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Robot fund manager struggles like a human in reignited trade war

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The reignited trade war is causing as much grief to our robot overlords as it is to human traders.

After a strong start to the year, the AI Powered Equity ETF (AIEQ), a fund driven by artificial intelligence, has stumbled this month, underperforming the broader U.S. stock market. The ETF has fallen 6.8% versus a 5.3% decline in the S&P 500.

The fund’s “manager,” a model which runs 24/7 on IBM’s Watson platform, has suffered from overweight positions in technology and energy shares, the worst-performing sectors in May, according to data compiled by Bloomberg. It is light on the outperforming real estate and health care names.

“This return data shows one thing clearly enough: artificial intelligence can get it wrong just like a human portfolio manager,” said Nicholas Colas, co-founder of DataTrek Research in a note to clients Thursday. “The question now is how the system is adapting its strategy for a more volatile and challenging investment environment.”

The quantitative model behind the fund, developed by EquBot, assesses more than 6,000 U.S. publicly traded companies each day. It scrapes millions of regulatory filings, news stories, management profiles, sentiment gauges, financial models, valuations, and bits of market data and then chooses about 30 to 70 stocks for the fund, which is run by ETF Managers Group.

The AI powered fund was launched in October 2017 and has beaten the market year-to-date, with its 15% return handily ahead of the 11.3% rise in the S&P 500. The ETF is a useful benchmark for active fund managers because its investment process is purposefully different from traditional approaches, according to Colas.

“AIEQ is trying to navigate the current volatility by staying away from S&P 500 names (most exposed to trade wars) while still maintaining enough beta exposure to benefit from any rally to come,” he said. “If that sounds almost human to you, we would agree.” – Additional reporting by Sarah Ponczek

Bloomberg News