Generative AI and Asset Management

Abstract

This paper proposes a novel measure of investment companies' reliance on generative AI, focusing on its implications for hedge funds. We document a sharp increase in generative AI usage by hedge funds after ChatGPT's 2022 launch. A difference-indifferences test shows that hedge funds adopting generative AI earn 3-5% higher annualized abnormal returns than non-adopters. We further identify this effect by exploiting ChatGPT outages as exogenous shocks. The outperformance originates from funds' AI talent and ChatGPT's strength in analyzing firm-specific information. Non-hedge funds yield no significant returns from AI adoption, suggesting generative AI may widen existing disparities among investors.

Keywords: ChatGPT, Hedge Funds, Reliance on AI information (RAI), Portfolio Return, Alpha, Outage, AI Disparity, Generative AI

JEL Classification: C81, G11, G14, G23