Does an AI-powered investment program actually exist?

Hello, this is Capital Cat! Investment programs using AI (artificial intelligence) have evolved rapidly in recent years, but there are still some limitations. By understanding the performance and limits of AI-based investment strategies, it is important to operate with realistic expectations while controlling risk.

The Reality of AI-Driven Investment Programs

Using techniques from machine learning, these are often referred to as AI-based investment programs that analyze and extract winning investment methods from algorithms such as genetic algorithms.

This uses AI in the process of generating the logic, but the generated logic itself is simply a program with a single operation.

However, there is an innovative reality in which AI can generate human-thought logic in a very short time.

Advantages of AI-Driven Investment Programs

First, let's review the main advantages AI brings:

1. Data Processing Power:
   • AI analyzes vast amounts of market data, news, social media trends, and technical indicators all at once, extracting information suitable for investment. It is a very powerful tool because it can analyze enormous data in real time that humans cannot process.
2. High-Speed Trading by Algorithms:
   • AI can execute the chosen strategy immediately and trade in milliseconds. Especially in high-frequency trading (HFT), it can identify market inefficiencies and profit with a precision and speed that humans cannot achieve.
3. Emotionless Trading:
   • AI is not swayed by emotions, so it can approach the market calmly and logically. This gives a significant advantage over human traders driven by fear and greed.

Limitations of AI Investment Programs

However, AI has its limits. Below are the main issues current AI investment programs face.

1. Unforeseen Market Fluctuations:
   • AI learns from past data, but this can be a limitation. Sudden market changes (for example, pandemics, geopolitical risks, sudden financial crises) may not fit the patterns AI learned, leading to erroneous judgments.
2. Handling Black Swan Events:
   • AI has difficulty effectively responding to unpredictable events called “black swans.” These events are historically rare, often not embedded in AI models, and it may take time to find countermeasures.
3. Impact of Data Bias:
   • If the data AI uses is biased, its analyses will be biased as well. AI can self-learn without human intervention, but learning from incorrect or inaccurate data leads to wrong decisions.
4. Overfitting:
   • AI learns from past market data, but overfitting can cause it to underperform in future unknown market conditions, even if it performs well under past specific conditions.
5. Rising Competition:
   • AI-based investment strategies are already used by many firms and individuals, increasing market efficiency and intensifying competition among AI systems. As a result, short-term arbitrage opportunities diminish and profit opportunities between AIs shrink.
6. Lack of Transparency:
   • The reasons behind AI decisions can become a black box. This makes it harder for investors to understand why a particular trade was made, leading to transparency concerns.

How to Win with AI Investment Programs and Their Limits

• How much can you win?: AI is very powerful in market analysis and data processing, and it can perform excellently under certain market conditions. It can succeed in quantitative trading, short-term arbitrage, and trades based on analysis of news and social media.
• Limits: However, AI struggles to handle unforeseen large market fluctuations and unpredictable events, so it cannot win in every scenario. There is also a risk that AI becomes overly optimized and cannot adapt to future market conditions.
• AI cannot keep up with changing market environments. To put it simply, when a war between countries begins somewhere, the market environment changes, and the data that was previously used no longer yields an edge.

Realistic Expectations and Risk Management

Investing with AI is very promising, but proper risk management is essential. It is effective to operate by combining human judgment with AI rather than entrusting everything to AI. Understanding where AI shines and its limitations, and formulating flexible investment strategies, is the key to success.

If you want to know more about investing or have questions about specific strategies, please let me know anytime!

Capital Cat