There’s a chasm that exists between everyday investors and big hedge funds; it’s the same gulf that recently inspired a group of online investors to set off a trading frenzy involving the once-blighted, then suddenly top-dollar GameStop stock.
As far as artificial intelligence innovations go … they’re on just one end of that divide: the Wall Street side.
Lofty as the ideals of an AI and machine learning future may be, local entrepreneur Kenneth Xu said the reality is that these technologies aren’t being used to bridge any gaps in the financial sector.
“New (AI) technology in the investment space has been around for a long time, but it’s primarily utilized by very sophisticated hedge funds, and not even average hedge funds — only the larger ones,” he said.
And, no matter how galvanized retail investors may be — and how willing they are to plunge personal funds into resurrecting hedge fund-shorted stocks — Xu said machines that can mine data, identify patterns and execute lightning-fast trades confer a major advantage.
The market’s ordinary participants don’t benefit from that AI-driven machinery, he added, which is expensive to develop and find homes for at hedge funds looking for an edge. Xu’s own Princeton-based startup is looking to change that.
Call it populist, call it what you will … his company, he said, is wholly committed to “democratizing investment for the average Joe.”
By offering smart, automated investment products to a broad base of clients, Princeton-based Ailares Inc. is doing something that Xu views as unique in the world of AI and machine learning. And he does see it as consistent with some of the current frustration with the retail investor-hedge fund wealth gap.
“It’s apparent to me that larger institutions have sophisticated technology that tends to be developed just for those large institutions,” he said. “And it makes sense, because that’s the most scalable business. But it shouldn’t be at the cost of ordinary investors having that access.”
The early-stage Ailares Inc., which Xu leads as CEO and chief investment officer, was founded in 2017 to leverage tech-informed investment strategies in equities and cryptocurrencies.
“That was when cryptocurrency was in a bear market,” he said. “People were not as familiar with it. It wasn’t as big as it is today, even if it’s still somewhat niche.”
Xu, who also serves as an investment theory adjunct professor at one of China’s top universities, the Shanghai-based Fudan University, came to this local fintech endeavor after several decades of financial sector work, including a top post at TD Bank.
He and his team at Ailares are developing an automated platform that generates a list of equities and what to do with them each day — a balance of long and short positions —and immediately executes those positions. This AI model liquidates each position by the end of the day and just holds cash overnight.
Xu said this approach limits a user’s exposure to risky trends in the overall stock market.
“If you look at today’s investment space, especially since the pandemic, it can seem rather crazy,” he said, adding that the recent explosion of GameStop’s stock price demonstrated that the market “has crazy volatility, and the potential for some investors to get burned if they don’t have the right tools.”
Machines have an advantage over human investors: They don’t trade on emotion — because, well, they’re not capable of having them. So, robots are especially robust when the market is volatile.
Xu said today’s retail investors don’t often take into account how much they’re impulsively rolling the dice with their own wealth in their dealings with the stock market.
“What sometimes isn’t understood is that, even if you win on a speculative basis, it doesn’t take very long to lose all of your gains,” he said. “If you don’t understand risk and how to manage portfolios, it’s gambling — not investing.”
The idea that this local startup’s AI-charged crystal ball is going to have it all figured out instead … Xu concedes that might raise eyebrows.
“People are always skeptical, and it’s understandable that they are,” he said. “So, we have to accumulate with this platform quite a bit of tracking history in order to prove this works.”
That’s what the company is currently working on: Testing its platform and measuring its success.
At the same time, it’s navigating a web of investment rules and regulations that Xu believes often doesn’t allow average people the same investment strategies as high net worth individuals and big hedge funds.
“So, the hurdles for us going forward are very, very high,” he said. “But, we firmly believe if we figure this out and make it widely available, we’ll be growing like crazy.”