An exchange-traded fund run by artificial intelligence bought AMC stock at the beginning of July, preferring shares in the cinema chain and retail investor favorite over the likes of Facebook or Walmart.
The Qraft AI-Enhanced U.S. Large Cap Momentum ETF, trading as AMOM AMOM, -0.42% on the New York Stock Exchange, removed some major technology and retail stocks from its portfolio this month as it shifted to focus on pandemic trades and reducing volatility.
Facebook FB, -0.91%, Walmart WMT, +0.08%, Home Depot HD, +1.09%, Adobe ADBE, -0.44%, and Texas Instruments TXN, -1.58% together represented around 28% of the fund’s holdings in June, but all five stocks were completely removed in the latest rebalancing at the beginning of July. The artificial intelligence controlling the fund believes these stocks will see price declines across the month.
A flock of investors, largely organized on social media platform Reddit, helped squeeze hedge funds’ short positions on companies including GameStop and AMC earlier this year. The trading frenzy caused multibillion-dollar losses for hedge funds, unbelievable gains for individuals that timed it right, and ushered in a new era of internet-inspired trading.
AMC’s stock price rose 570% from January 20 to January 27—from nearly $3 a share to almost $20. Shares in the group are now up close to 1,500% so far in 2021, trading around $33.
And now the AI calling the shots at AMOM thinks the stock will move even higher in July, buying enough shares to make up 1.8% of the fund. Bringing AMC into the fold came as the robot ditched fellow meme stock GameStop, which was added to AMOM in May but booted out after the stock fell more than 14% in June.
“Qraft’s AI model is not specifically designed to invest in meme stocks, but rather in stocks with high capital appreciation potential,” Geeseok Oh, a managing director at Qraft and the head of its Asia-Pacific business, told MarketWatch.
“AI is not swayed by prejudice or bias and may pick up meme stocks if the momentum seems highly positive,” said Oh. “This month, our model found AMC more opportunistic than other meme stocks like GameStop.”
The top five stocks by portfolio weight added to AMOM in July include retailer O’Reilly Auto Parts ORLY, +0.41%, software group Cadence Design Systems CDNS, -0.92%, electronics store chain Best Buy BBY, +1.90%, biotech cancer specialist Seagen SGEN, +1.07%, and enterprise software developer HubSpot HUBS, -0.71%.
After the fund was rebalanced, AMOM’s five largest holdings by portfolio weight were online dating group Match MTCH, +0.80%, cybersecurity company Fortinet FTNT, +0.18%, O’Reilly Auto Parts as well as rival AutoZone AZO, +1.08%, and retailer Kroger KR, +1.36%.
“With Covid-19 reaching new peaks, the AI made trades related to the pandemic conditions,” Oh said. “Match Group is one of the beneficiaries of the pandemic with more people trying out online dating. Fortinet stock gained prominence with more and more governments emphasizing the importance of cybersecurity.”
Oh also added that it was noteworthy that AMOM has decided to adjust its portfolio away from very big bets—in June, the fund’s top three stocks accounted for 21% of the portfolio, but now the top three stocks account for just 11%.
“Given the volatile market sentiment, the AI seems to have adjusted portfolio and concentration to hedge against potential risks,” he said.
AMOM has been listed in New York since May 2019, and has delivered total returns of 12% so far in 2021 and 42% in the past year—outpacing its benchmark, the S&P 500 Momentum index, which has climbed a comparable 34% since July 2020.
The fund is a product of Qraft, a Seoul, South Korea-based fintech group leveraging AI across its investment products, which include three other AI-picked versions of major indexes: a U.S. large cap index QRFT, -0.50% ; a U.S. large cap dividend index HDIV, -0.10% ; and a U.S. value index NVQ, -0.71% NVQ.
AMOM is an actively managed portfolio driven by artificial intelligence, tracking 50 large-cap U.S. stocks and reweighting its holdings each month. It is based on a momentum strategy, with the AI behind its stock picks capitalizing on the movements of existing market trends to inform the decision to add, remove, or reweight holdings. The artificial intelligence scans the market and uses its predictive power to analyze a wide set of patterns that show stock-market momentum.
The entrance of AI-run funds onto Wall Street promised a new high-tech future for investing, though it hasn’t quite lived up to the hype yet. Theoretically, researchers have shown that AI investing strategies can beat the market by up to 40% on an annualized basis, when tested against historical data.
But Vasant Dhar, a professor at New York University’s Stern School of Business and the founder of machine-learning-based hedge fund SCT Capital Management, argued on MarketWatch in June 2020 that AI-run funds won’t “crack” the code of the stock market.
Advocating caution, Dhar said that it was difficult for funds underpinned by machine learning to maintain a sustainable edge over markets, which have “a nonstationary and adversarial nature.” He advised investors considering an AI system to ask tough questions, including how likely it is that the AI’s “edge” will persist into the future, and what the inherent uncertainties and range of performance outcomes for the fund are.