Bridgewater, the world's largest hedge fund, is building a machine-learning engine to predict global economic events and invest clients' money accordingly.
The Westport, Connecticut-based hedge fund plans to launch a fund on July 1 that will combine various AI models to make investments on behalf of a few clients, Bridgewater's co-chief investment officer, Greg Jensen, told Business Insider in an interview.
The efforts have been led by a new group at Bridgewater, called the Artificial Investment Associate (AIA) Labs. It's made up of 20 investors and machine-learning scientists on the mission "to do everything that we do via machine-learning techniques," Jensen said.
For Bridgewater, one of the largest hedge funds in the world, that means replicating every step of the investment process with AI and machine learning, from understanding global financial and economic patterns, to creating investment theories, and plugging those theories into machine-learning models to check if the theories are accurate or not. Risk controls and oversight will still be in the hands of humans, Jensen said, and there will be a kill switch if there's ever a need to turn it off.
Jensen will have oversight over the fund. But the rest, from idea generation to testing and the models used to make trades, will all be developed through AI and machine learning.
This is a first for Bridgewater, which started building the fund via AIA Labs about a year ago. Bridgewater certainly isn't the first hedge fund to try and get AI to beat the markets, but funds that have tried have had lackluster results. One challenge is doing so requires a lot of data, of which there isn't a lot when it comes to major economic cycles, Jensen said, and you need the future to behave like the past, which also isn't a guarantee.
Bridgewater's so-called "artificial investor" is exceeding expectations by making solid predictions about what's next for the euro, or what's next for inflation, Jensen said. And once the fund launches, Jensen is hoping the AI investor will get "much more powerful" as a "loop of learning" mints more data.
"In some sense, I feel we've been able to create the bones of something that will be more than the sum of its parts," Jensen said. "We won't describe specifics, but I do expect we will be able to generate a unique source of alpha that is designed to have both high returns and is uncorrelated to markets and other sources of alpha."
Bridgewater aims to launch the fund with a few initial partners, "each with strong commitments to learning alongside us as the technology advances and our approach progresses in parallel," Jensen said. The firm declined to disclose how much seed capital it will start with.
Inside AIA Labs
AIA Labs will play a critical role as Bridgewater looks to transform itself with AI. The venture is led by Jasjeet Sekhon, who is the chief scientist of the hedge fund.
Sekhon came to Bridgewater in 2018 after a life in academia, where he taught machine learning at Harvard, UC Berkeley, Yale. His specialization is in causal inference, or the study of finding out what caused something to occur in the world. Sekhon applies machine learning to analyze Bridgewater's reams of data from the past to predict what will happen in the future.
At AIA Labs, much of the work is focused on combining statistical models with language models. The latter can forming sentences and are key to creating investment theories, but what language models aren't so good at is ensuring that what it's saying is true. That's where the statistical models come in, they can help determine whether the theories are true or not. And now, AI language models have progressed to the point where humans can interrogate and probe them, much in the same way people talk to each other through language, Sekhon said.
"It's really that this moment is the integration of language models, with the type of time-series models Jas has been working on a long time, combined with how far — in part by our own pushing — but how far diagnostic tools have come to understanding machine learning algorithms," Jensen said. "Those pieces coming together is what has made this point so incredibly special."
But there are still technical and regulatory hurdles that Bridgewater will need to overcome before the fund can launch.
"Markets are extremely difficult, so I don't want to overstate how well this will work," Jensen said. That said, "it's good enough that I would stamp it as a good return stream," he added.
