Fundsters, beware. Machine learning is coming.
This morning Morningstar's John Rekenthaler ponders
the rise of machine learning. He points in particular to a Google program, AlphaZero
, that was created last year with the ability to learn how to play chess (instead of being preprogrammed with chess analysis and insights). Rekenthaler wonders when such technology will come to the mutual fund world.
AlphaZero played itself and then succeeded in going undefeated against a top chess-playing program. Rekenthaler predicts that machine learning will win when it comes to the investing world, too. These days quantitative funds function along similar lines to old school chess programs (think Big Blue
) with a programmed set of instructions and analysis provided by humans -- any learning and adjustment is done by the humans running them, not by the programs themselves.
The way Rekenthaler sees it, quant funds powered by machine learning will be able to give index funds a run for their money and revive active management. Perhaps. But like indexing, regulatory change, and fee compression, this might be another advancement that favors the mutual fund industry giants (who can pour more money into research and development of such things and amortize the cost across more assets). It's a race that smaller fund firms are unlikely to win.
Neil Anderson, Managing Editor
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