“If you think about the hedge-fund world today, that has pods that each focus on specific areas of expertise, in a sense, we’re recreating the very basics of that structure where we have these different inspirations for investors we really respect,” Doug Clinton, Intelligent Alpha’s CEO and founder, said.
While the product’s ambitions stand out as particularly bold - even for the buzzy world of ETF investing - it’s Wall Street’s latest attempt to weaponize AI to create new riches for investors of all stripes. Some hedge funds already use chatbots for research and investing processes and say AI can significantly cut down time spent on menial tasks.
The overall idea still remains largely experimental and untested. Little evidence exists that AI is disrupting and displacing investing units en masse, and much has yet to be resolved when it comes to issues like chatbots making things up in their answers.
There’s also no proof just yet that investments chosen by AI have a leg up over passive investing. Of the 16 AI-centered ETFs in the US tracked by Bloomberg Intelligence, just one is outperforming the S&P 500 this year: the Franklin Intelligent Machines ETF (ticker IQM). The fund returned 19% while the stock index gained 18% as of the last close.
Further, only one - the Global X Artificial Intelligence & Technology ETF (AIQ) - has seen meaningful inflows, taking in more than US$1 billion (NZ$1.6b) this year. That’s followed by a US$117 million (NZ$189m) haul for the Roundhill Generative AI & Technology ETF (CHAT). The rest have seen tiny inflows or outright outflows year-to-date.
Clinton says that many of the other AI-centered ETFs tend to rely on traditional machine-learning techniques and might not yet be incorporating LLMs like his fund.
“That limits those strategies to the crowded market of quantitative insights,” he said.
The idea for the ETF arose last year when Clinton started experimenting with ChatGPT to create a portfolio that could beat the S&P 500, which he says he had luck doing. Over time, his tinkering turned into 40 different strategies whose performances are measured against various indexes, and led to the founding of Intelligent Alpha.
The company, an affiliate of Deepwater Asset Management, is an independent registered investment adviser that’s built to use large-language AI models for portfolio management. The ETF is its first fund, but the firm will look to launch a suite of products that also includes custom portfolios and hedge funds, according to Clinton.
It will also aim to tailor its offerings to both retail and institutional investors. Intelligent Alpha has already filed for other ETFs as well.
Minneapolis-based Deepwater - formerly known as Loup - manages roughly US$400 million across venture capital and public equity funds. Alongside Clinton, it was co-founded by the well-known tech analyst Gene Munster.
The new AI ETF pays homage to Jesse Livermore - one of the early 20th century’s most legendary stock traders - with its ticker LIVR. It charges a 0.69% fee, and may invest in a company that Buffett’s Berkshire Hathaway conglomerate, for instance, does not hold. The fund does, however, have final human oversight.
“Just to make sure there’s not some sort of a hallucination in the portfolio, like a company that committed fraud or some egregious issue,” Clinton said. “And also that the portfolio will meet any regulatory or compliance constraints that we might know about that the AIs may not be thinking about when they create the portfolio.”
© Bloomberg
