Dechert retained SEDA Expert Richard Marin to provide his expert opinion on the fund preparation and risk management strategies deployed by a fund manager when utilizing a proprietary artificial intelligence system to make trading decisions on behalf of an investor. The strength of his expert report was instrumental in successfully settling the matter.
THE CASE
The case presented timely questions about the roles and responsibilities of fund managers when deploying artificial intelligence (AI) systems to make investment decisions on behalf of investors.
A fund manager developed an AI system that analyzed overnight market sentiment on social media to determine broad market direction. Significant changes in sentiment triggered market-at-open positioning (long or short) in highly liquid market index ETF shares.
The manager agreed that an offshore investor would invest in a fund that would be managed by them using this AI system to make investment decisions without the aid of humans. The investor invested in the fund using a blend of core equity and leveraged financing.
A supercomputer was set up to run the algorithm and interpret the results. Prior to engaging in active trading, the manager ran a test fund and engaged in backtesting to validate the strategy. Active trading ended a few months after it started due to an extreme correction in the quantitative markets.
In the initial 60 days, the fund experienced varied but acceptable results. Then, on a single day, the fund sustained a notable loss. The volatility on this day was significant enough to trigger a static stop-loss order that had been incorporated into the system to manage risk. While this loss represented a fraction of the invested amount, the investor disputed the use of the static stop-loss order, which led the investor to terminate and redeem their investment.
The investor sued the manager, alleging it had misrepresented the capabilities of the AI system and had not adequately tested the system.
THE EXPERTS' ROLE
SEDA Experts strategically partnered with counsel to identify an expert who could speak to the key merits of the case. The investor had already retained a top quantitative analyst in London to analytically debunk the backtesting protocols. Richard Marin was retained by counsel for the fund manager based on his extensive experience running three world-class money management firms and his specific experience managing a large stable of hedge funds, including start-up funds that used backtesting analytics to validate trading strategies. Mr. Marin had also acted as a Clinical Professor of Investments at Cornell University’s Graduate School of Business for ten years, teaching the primary course in hedge funds and all aspects of their creation, management, and deployment. The depth of Mr. Marin’s experience positioned him to not only successfully respond to the quantitative analysis put forth by the investor’s expert but also contextualize it by considering other relevant factors involved in the matter.  Â
His contributions included the assessment of:
the losses involved in the case in light of the scale of the investment and the nature of the strategy deployed, highlighting measures the fund manager took to moderate the potential for loss;Â
the appropriateness of the risk management strategies applied to the system, including using static stop-loss orders to manage the risk for this particular fund, given the volatility of the operative market and the leveraged position of the investor; andÂ
the adequacy of the testing and analytical work completed before trading began in a live environment.Â
THE RESULT
On the strength of Mr. Marin’s opinion, a settlement was reached.
EXPERT INVOLVED
Richard Marin
Richard Marin as a former finance senior executive with over 40 years of industry experience, and as a former clinical professor at Cornell University is a world class testifying expert in asset management, alternative investments, private equity investments, securities lending, retirement and pensions, and real estate / project financing.
Learn more about SEDA at sedaexperts.com
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