Artificial Intelligence Offers the Sci-Fi Touch to Hedge Fund Investing at NeuWorld

December 14, 2000 (—It may not be 2001 yet, but a smart computer akin to HAL has helped to jump-start an investment management odyssey at NeuWorld Financial in San Diego.

NeuWorld was launched in 1992, offering traditional money management with a high-tech twist. Five years ago, NeuWorld started the Capital Appreciation Fund LP using a computer with artificial intelligence to pick the stocks for a long/short equity investment strategy.

The fund now has $1 million and will be closed to new investors at the end of the year. Instead, new investors will be allowed to invest in a separate account arrangement with a minimum investment of $100,000, said Barry Hippensteel, senior vice president of the firm.

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“We have proved we have the machine that can analyze and pick stocks,” he said.

The decision to close the fund, which accepted minimum investments of $10,000, was made to help grow the firm’s business by accepting larger installments of assets from individual investors, Mr. Hippensteel said.

NeuWorld’s Eagle12 computer system analyzes 4,000 U.S. stocks quarterly using 116 variables. Stocks are then split into five categories that group stocks by their potential to increase in price within the next two months.

Category 4 and 5 stocks are shares that would be shorted in the hedge fund. But right now the fund is all long-equity since Eagle12 is bullish on the U.S. stock market, Mr. Hippensteel said.

Eagle12 uses neural network technology, which recognizes patterns and intricate relationships. Neural nets also allow a machine to analyze tremendous amounts of information to forecast results.

Mr. Hippensteel said the firm has been pleased with Eagle12’s work, although the NeuWorld onshore fund has posted mixed results this year. In the third quarter, the fund lost 9.38%, but in August gained 12.54% net of fees.

“We’re not a genie in a bottle,” Mr. Hippensteel said.

Perhaps the best part of the artificial intelligence technology the firm uses is the computer’s ability to learn from its mistakes. The knowledge the computer system acquires is then applied to solve new problems.

NeuWorld’s fee structure on its fund is based on Eagle12’s ability to outperform. A 1% annual administration fee is charged to clients. And if the fund performance over the preceding 12 months has been positive and exceeds the S&P 500 by 500 basis points, the firm is entitled to a quarterly performance bonus of 1.25% of assets under management. The fee structure will likely differ for separate account arrangements launched after the fund’s closing.

Susan L. Barreto, Senior Reporter


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