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Delegates see future for human money managers

Time to debate: Michael Murphy, CEO of Rosecliff Ventures, left, Zachary Schwartz, president of ZSC Inc, and Jon Najarian, co-founder of Najarian Family Office, at the Wais conference in Bermuda (Photograph by Scott Neil)

It was human brain power that was tested in a debate on the future of artificial intelligence in the investment world.

At the second World Alternative Investment Summit Bermuda, trading exports Michael Murphy and Jon Najarian took opposing sides on the motion: “Artificial Intelligence will replace stock picking portfolio managers sooner than you think.”

Mr Murphy, founder of Rosecliff Ventures, pointed out that a graph of the US stock market, when viewed over a century, shows a steadily continuing rise with a few “blips” when market crashes occurred.

He said the blips, where people have lost money, can be eradicated by taking human emotion out of the equation through AI stock-picking.

Mr Murphy, who appears on FoxBusiness, said technology is already helping to eliminate human error from portfolio and investment management. He mentioned the growing popularity of passive investment strategies such as index-based ETFs, where investors are less likely to jump in and out of positions based on short-term news and fears.

“People recognise that humans make mistakes. Algorithms can make investments based on the facts that are there,” he said.

In the future, Mr Murphy believes people will set a plan for their retirement with goal investment return figures, and then sit back while an AI program controls their portfolio.

He also said that most people can’t predict the tops and bottoms of markets, and so by using AI the “human emotion” is taken out of investment decisions, such as any potentially unwise moves sparked by sudden and major market shifts.

Presenting the case against the motion, Mr Najarian suggested that an AI program running during the past two years would likely have made missteps in the face of unpredictable factors, such as the near record-breaking length of the current bull market, reactions to Fed rate decisions, and geopolitical matters.

He drove home the point, stating that “black swan” events — occurrences that deviate from the normal and are extremely hard to predict — should happen once in a lifetime.

“I’ve been trading for 36 years and I’ve seen three ‘black swans’ in that time,” he said, adding that AI would have to get very intelligent to successfully deal with such unpredictability.

He said most AI would have thought the US dollar would have risen in response to recent Federal Reserve rate hikes, yet that had not happened.

“The market frustrates you. And when there is a hiccup, maybe some of the [AI] funds get flushed.”

He also challenged the “buy-the-dip” strategy that is being played out daily in US markets. He warned: “When it does not work it might break in a big way.”

Mr Najarian is an options trading expert and co-founder of Najarian Family Office. He also appears on CNBC’s Halftime Report and Fast Money.

During the debate at the conference, which is being held at the Fairmont Southampton, he noted there have been examples of algorithm programs trying to spoof other algorithms in order to create a stock market movement. This type of spoofing is now illegal in the US.

He said that if the majority of people opt for passive investing then there will likely be much bigger outperformance by those who remain outsiders and active traders.

Mr Najarian said people tend to panic, and when volatility rockets there would be people bailing out of AI investment programs, saying things like: “I’m cutting this one off and moving onto the next.”

He accepted Mr Murphy’s assertion that over the long-term markets have always recovered from crashes and gone on to greater heights. In turn, Mr Murphy agreed with Mr Najarian’s point that “if you have a six-month timeframe, it’s dangerous to be in AI”. The debate was lightheartedly styled on the British House of Commons, with Mr Murphy filling the role of Prime Minister to Mr Najarian’s Leader of the Opposition. Maintaining order was “Speaker of the House” Zac Schwartz, complete with gown and wig. Mr Schwartz is president of ZSC Inc.

A vote before the debate showed a 19-17 split against the motion. A vote after the debate came out at 24-19 against the motion. Mr Schwartz deftly skated over the voting irregularity that revealed more people had voted at the end. He declared the motion lost.

The Wais conference, organised by Radius Financial Education, continues today. Further details are available at www.waisc.com