Bitcoin and AI: The Future of Hedge Funds?

By Nathan Reiff

Hedge funds were born and raised on the premise that certain brilliant investment minds could make educated judgments based on market trends and business practices in order to invest in such a way as to deliver consistent, extraordinary returns. Early titans of investment, such as billionaires George Soros and Warren Buffett, still retain a mystique associated with their savviness when it comes to investment decisions. In recent years, quant funds have risen to prominence thanks to computer algorithms and new methodologies designed to beat human investment decisionmaking in terms of time and accuracy, and with regard to bias as well. Now, there seems to be another trend that is primed to overtake the hedge fund industry: computer learning and artificial intelligence funds.

 

Bitcoin and AI in a Fund

How could a hedge fund utilize technology and strategies representative of Bitcoin or artificial intelligence in an effort to achieve an edge over its peers? According to a recent article by Wired, many funds have already found a way of utilizing these approaches. Numerai, for instance, a hedge fund based in San Francisco utilizing machine learning models, has developed its innovative programs by hiring an army of data scientists around the globe, each of whom is paid in Bitcoin. Other funds, such as Quantiacs or Quantopian, are finding yet other ways to utilize the brainpower of the larger collective community as well.

Polychain is another fund which is focused on cryptocurrencies like Bitcoin. In the case of this firm, though, the managers make investments only into these fledgling and unregulated currencies, oftentimes incorporating blockchain technologies both in their research and in their investment approach. Rather than investing in the currencies directly, a fund like Polychain trades in those companies that have been founded on the principles of utilizing decentralized and anonymous online investors that are made most popular by currencies like Bitcoin.

 

Proliferation Imminent

As the earliest experiments in new fund strategies based on Bitcoin and artificial intelligence see success, analysts expect that these firms will, in turn, inspire other funds which emulate their approaches. Jeffrey Tarrant, CEO and founder of Protege Partners, is working to create a directory to chart and track these new funds. At this point, Tarrant says the directory has about fifty different firms represented, some of which are public and others of which are still in development. Will all of these funds succeed in turning a profit at the rate that hedge fund investors have come to expect? Almost certainly not; the hedge fund world has always been cutthroat, with only the strongest and most profitable firms surviving. But regardless, this new wave of hedge funds seems to only be getting larger and more dominant in the industry dialogue.