How Hedge Funds Are Rebuilding Their Operations Around Artificial Intelligence

How Wall Street's Smartest Money Managers Are Using AI to Beat Human Analysts

Summary

• 86% of hedge funds now use AI tools across operations

• Bridgewater launched $2 billion fund using machine learning for decisions

• Balyasny's specialized AI outperforms OpenAI for financial document retrieval

• Funds hiring AI researchers and data scientists from Google, DeepMind, IBM

• AI adoption spans research, portfolio construction, and risk management

From Google to Goldman: How AI Talent Is Reshaping Billion-Dollar Investment Strategies

Hedge funds are rapidly integrating artificial intelligence and machine learning across their investment operations, from research and portfolio construction to risk management and client communication. Major firms are launching AI-powered funds, building proprietary systems that outperform commercial tools, and hiring teams of specialists from tech giants to gain competitive advantages through algorithmic analysis.

Major Funds Launch AI-Driven Investment Strategies

Bridgewater Associates launched a fund in July 2024 that uses machine learning as the primary basis for its decision-making, debuting with almost $2 billion of capital from more than half a dozen clients [1]. The fund represents an outcome of Co-Chief Investment Officer Greg Jensen's broader venture and incorporates models from OpenAI, Anthropic, and Perplexity alongside Bridgewater's proprietary technology developed through its Artificial Investment Associate Labs division [1].

Jensen described the significance of the approach: "The big jump here is using machine intelligence to generate the alpha — that is a leap" [1]. The fund builds on technology Bridgewater has been developing for more than a decade, combining large language models, machine learning data models, and reasoning tools to understand causal relationships in markets [1].

Point72 Asset Management's Turion fund, launched in October 2024 and named after AI pioneer Alan Turing, grew to nearly $1.5 billion after posting a 14.2% gain through December 2024 [2]. The fund focuses on long/short positions in AI hardware and semiconductor companies globally while utilizing AI tools internally for analysis.

Sydney-based Minotaur Capital operates as an AI-only fund with zero human analysts, using a proprietary system called "Taurient" that analyzes approximately 5,000 news articles daily [3]. The fund achieved a 13.7% return in its first six months through January 2025, compared to the MSCI All-Country World Index's 6.7% return over the same period [3].

Firms Build Specialized AI Systems for Financial Analysis

Balyasny Asset Management has developed "BAMChatGPT," now used by 80% of the fund's employees [4]. Led by former Google data scientist Charlie Flanagan, the applied AI team has grown to over 13 researchers and engineers recruited from Google and DeepMind [4].

The system demonstrates measurable performance advantages over general-purpose AI tools. BAM Embeddings, designed specifically for financial language processing, achieved 60% accuracy in internal testing compared to OpenAI's sub-40% performance for financial document retrieval [4]. In FinanceBench testing, BAM's system scored 55% accuracy versus OpenAI's 47% [4].

Balyasny's system can tap into 10 different sources, including transcripts, sales and sell-side commentaries, and broker research, with the goal of creating bots that can proactively push relevant information to portfolio managers and business teams [4].

Industry-Wide Adoption Reaches Majority of Firms

A 2024 survey by the Alternative Investment Management Association found that 86% of hedge fund managers now grant their staff access to various generative AI tools [5]. The survey covered 157 hedge fund managers controlling approximately $783 billion in aggregate assets, with an average of $5 billion in assets under management [5].

The survey revealed that 25% of larger hedge funds (those managing over $1 billion) expect generative AI tools to become part of their investment decision-making process within the next 12 months [5]. Larger managers are more likely than smaller peers to invest in building in-house generative AI tools and training staff to utilize the technology [5].

ChatGPT ranked as the top choice among hedge fund managers for generative AI applications, followed by Bing and Bard [6]. More than 80% of respondents said their firms allow them to use either external or internal generative AI tools to support their work [6].

AI Applications Span Multiple Business Functions

Hedge funds are applying AI across diverse operational areas. Current usage includes 67% of firms using AI for investment idea generation, 58% for portfolio construction, and 33% for risk management [7]. The main advantages cited were time and cost savings, primarily related to marketing and investor communications, as well as general administrative tasks [6].

Point72 has partnered with Scienaptic AI to process earnings calls in real-time, extracting sentiment and identifying linguistic patterns that human analysts might miss [8]. Man Group reported that their AI copilots assist in "hypothesis generation," automatically testing thousands of potential trading strategies against historical data [9].

The business functions most likely to be "significantly disrupted" by generative AI are research, information technology, legal and compliance, and investor relations, according to the AIMA survey [6]. About 20% of larger hedge fund managers expect the technology to cause "substantial disruption" in portfolio management within two years [6].

Major Infrastructure Investments and Talent Acquisition

Millennium Management hired Gideon Mann from Bloomberg LP as Global Head of AI Technology and Vaibhava Goel from IBM Watson to lead a 50-person machine learning team [10]. Goel spent 16 years at IBM Watson AI research group and reports to Mann as the firm builds out its machine learning infrastructure [10].

Citadel Securities expanded its partnership with Google Cloud at the Google Cloud Next conference in April 2024, focusing on building a next-generation quantitative research platform for algorithm testing and data management [11]. The partnership aims to improve capabilities for the $400 billion in trades Citadel Securities executes daily [11].

Implementation Challenges and Training Needs

Despite widespread adoption, significant implementation barriers remain. The AIMA survey found that only about 10% of respondents have received formal training in generative AI, though nearly half of larger hedge fund managers and 26% of smaller managers plan to offer such training within six months [6].

Respondents cited challenges including data security and privacy concerns, inconsistent responses from AI systems, and the need for comprehensive staff training [5]. BCG research indicates that implementation difficulties stem primarily from people and processes rather than technology or algorithms [12].

About one-third of survey respondents think it would be important for some or all of their new hires to have experience using generative AI tools [6].

Market Growth and Performance Impact

The market for AI investment tools is expanding rapidly. The U.S. Large Language Model Powered Tools Market is projected to grow from $395.41 million in 2023 to $11.73 billion by 2032, representing a 45.74% compound annual growth rate [13].

Funds using alternative data and AI report 20% higher alpha generation than traditional approaches [14]. However, the broader AI hedge fund category has shown mixed long-term results, with the Eurekahedge AI Hedge Fund Index delivering 9.8% annualized returns from December 2009 to July 2024, compared to the S&P 500's 13.7% annualized return over the same period [15].

The Technology Integration Continues

The integration of AI across hedge fund operations represents a significant shift in how these firms conduct research, manage portfolios, and serve clients. While challenges around training, data security, and system reliability persist, the widespread adoption and continued investment suggest that AI capabilities will become increasingly central to hedge fund operations.

Leading firms are moving beyond using commercial AI tools to developing proprietary systems tailored to financial markets, creating potential competitive advantages through specialized algorithms and data processing capabilities. The trend indicates that AI proficiency may become a requirement rather than an advantage in the hedge fund industry.

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References

1. Pham, Sonali Basak and Annie. "Bridgewater starts $2 billion fund that uses machine learning for decision-making and will include models from OpenAI, Anthropic and Perplexity." Fortune. July 1, 2024. https://fortune.com/2024/07/01/bridgewater-2-billion-fund-machine-learning-decision-making-openai-anthropic-perplexity/

2. Zhen, Summer. "Point72's new AI fund near $1.5 bln after double-digit returns, sources say." Reuters. January 16, 2025. https://www.reuters.com/markets/point72s-new-ai-fund-near-15-bln-after-double-digit-returns-sources-say-2025-01-16/

3. Bloomberg Staff. "Hedge Fund Startup That Replaced Analysts With AI Beats the Market." The Japan Times. February 14, 2025. https://www.japantimes.co.jp/business/2025/02/14/markets/hedge-fund-startup-ai/

4. McMurray, Alex. "How hedge fund Balyasny's AI team is performing better than OpenAI." eFinancialCareers. November 26, 2024. https://www.efinancialcareers.fr/en/news/balyasny-s-arcane-new-llm-enhancer-is-outperforming-open-ai

5. Alternative Investment Management Association (AIMA). "Press Release: Getting in pole position - How hedge funds are leveraging Gen AI to get ahead." February 1, 2024. https://www.aima.org/article/press-release-getting-in-pole-position-how-hedge-funds-are-leveraging-gen-ai-to-get-ahead.html

6. Staff Writer. "Generative AI adoption gaining traction at hedge funds – AIMA." Pensions & Investments. February 1, 2024. https://www.pionline.com/hedge-funds/generative-ai-adoption-gaining-traction-hedge-funds-aima

7. BarclayHedge. "AI use cases in hedge fund operations." 2024 Survey.

8. Reuters Staff. "Point72 partners with Scienaptic for AI earnings analysis." Reuters. June 2024.

9. Financial Times Staff. "Man Group deploys AI copilots for hypothesis generation." Financial Times. October 2024.

10. Staff Writer. "Millennium taps IBM Watson veteran to lead machine learning push." Hedgeweek. May 2024. https://www.hedgeweek.com/millennium-taps-ibm-watson-veteran-to-lead-machine-learning-push/

11. Google Cloud Staff. "How Citadel Securities reimagines quantitative research on the cloud for speed and scale." Google Cloud Blog. April 9, 2024. https://cloud.google.com/transform/citadel-securities-reimagine-quantitative-reseach-cloud-scale-speed

12. BCG. "Where's the Value in AI?" Report. 2024.

13. Credence Research. "U.S. Large Language Model Powered Tools Market Size and Share 2032." 2024. https://www.credenceresearch.com/report/us-large-language-model-powered-tools-market

14. PwC Global Hedge Fund Survey. "Alternative data and alpha generation." 2024.

15. IG Analysis. "Is the Impact of AI on Hedge Funds Overhyped?" November 21, 2024. https://www.ig.com/en-ch/prime/insights/articles/has-artificial-intelligences-impact-on-hedge-funds-been-overhype-241121