An Oxford University study suggests that artificial intelligence and machine learning can pick private equity funds that deliver above-average returns – meaning technology really might be better than humans.
The machine used within the study selected funds that generate returns that are 5 per cent higher each year compared to average funds.
Private equity assets under management now sit at around $8 trillion and are an increasing part of most institutional investor portfolios.
The researchers claim that ‘fund managers have considerable degrees of freedom to frame their track records at the time of fundraising (and) as a consequence, PE fund manager selection is particularly difficult.”
The study – titled Limited Partners versus Unlimited Machines – suggests robots may be better at picking their fund managers than humans, however.
Artificial intelligence read prospectuses and – crucially – financial information to arrive at its conclusions.
The team of researchers led by Ludovic Phalippou, Professor of Financial Economics at Oxford Saïd, shows that the quantitative information that investors pay significant attention to during their due diligence process, such as firm reputation and past performance, is ultimately unrelated to private equity fund performance.
Investors do not seem to react to the qualitative information in fund prospectuses, but that information can be used by an AI robot to predict returns.
By picking above-average funds, it stands to reason that artificial intelligence is better at fund picking than the collective human pool of fund-pickers – though that does not necessarily mean that some fund-pickers may not be smarter than the AI.
“It is the first time that artificial intelligence is shown to be able to select investments based on dense, and technical documents that are written exclusively for highly specialized and large institutional investors; and the robot beat most of these large professional investors,” Phallippou said.
“That’s a world premiere,” he added.