A robot can select the best private equity (PE) funds, new research from Saïd Business School at the University of Oxford has shown.
According to the study, such technologies can choose the best PE funds by reading fundraising prospectuses. The machine used within the study selected funds that generate returns that are 5% higher each year compared to average funds.
In the paper, Limited Partners versus Unlimited Machines; Artificial Intelligence and the Performance of Private Equity Funds, a team of researchers led by Ludovic Phalippou, Professor of Financial Economics at Oxford Saïd, shows that the quantitative information that investors pay significant attention to during their due diligence process, such as PE firm reputation and past performance, is ultimately unrelated to PE fund performance.
In contrast, investors do not seem to react to the qualitative information in fund prospectuses, but that information can be used by a robot to predict returns.
Ludovic commented: ‘It is the first time that artificial intelligence is shown to be able to select investments based on dense, and technical documents that are written exclusively for highly specialized and large institutional investors; and the robot beat most of these large professional investors. That’s a world premiere.’