Financial Firms, ESG Investors Join Hedge Funds in Using AI Tools

For more than a year, hedge funds like Black Rock and Domeyard have relied on AI in high-speed trading, with variable results. Now other financial groups, banks and private equity firms are joining in.

According to a story in London’s Financial Times, one group of investors in particular see the value in adopting AI tools: ESG investment advisors. ESG, or “environmental, social, and governance” stocks involve investing according to how the companies benefit the world as a whole. Using AI algorithms can help financiers find information about areas like carbon footprints, recycling, how they treat employees and other harder-to-quantify factors. By using AI to scrape for keywords in patent filings, JPMorgan can find companies linked to new low-carbon technology, for instance.

“We know what data we need,” said Jennifer Wu, head of ESG investing at JPMorgan Asset Management, but “we are looking elsewhere to see where we can find it,” she told the Financial Times.

Ravit Mandell, the chief data scientist at JPMorgan, recently helped launch a so-called “Themebot” algorithm to zero in on relevant information from unstructured data. Portfolio managers can then find information that’s not available in traditional financial sources, he told A story further explored the algorithm’s use.

Tom Doris, head of trader intelligence for Liquidnet, tells CNBC how AI will support the financial services industry.

For instance, U.S. Ball corporation would seem an environmentally inefficient company because of the energy used to create its products. Accordingly, it has been poorly rated by ESG rating agencies. However, through the algorithm, investors can discover that it recycles more than 75% of the aluminum it uses for products, which is becoming more appealing because of the damage being done by plastic.

Financial experts interviewed by said they are relying on machine learning to mine data for their decisionmaking. Citigroup uses it to give portfolio recommendations to clients. High-frequency trading firms use it to track and trade in fast-moving financial markets and portfolio managers use complex algorithms for “sophisticated investment ideas.”

“It takes emotion out of it. Everything is rational,” Mike Chen, an equity portfolio manager at Boston-based PanAgora, which manages $43 billion in assets, told CNN Business from the sidelines of the Cayman Alternative Investment Summit in Grand Cayman.

In addition, they’re exploring new ways to boost their investments. Citi Private Bank uses machine learning to show curious clients what other investors doing with their money, anonymously sharing portfolio moves being made by global clients. Domeyard, a Boston hedge fund that focuses on high-frequency trading, uses machine learning to decipher 300 million data points in the New York Stock Exchange’s opening hour of trading alone.

According to a New York Times story, many financial advisors have mixed feelings about AI. It is still far from surpassing humans in investing decisions, but they see it as a necessary part of their toolkit.