Li is now suing Tyndaris for about $23 million for allegedly exaggerating what the supercomputer could do. Lawyers for Tyndaris, which is suing Li for $3 million in unpaid fees, deny that Costa overplayed K1’s capabilities. They say he was never guaranteed the AI strategy would make money.
Sarah McAtominey, a lawyer representing Li's investment company that is suing Tyndaris, declined to comment on his behalf. Rob White, a spokesman for Tyndaris, declined to make Costa available for interview.
The legal battle is a sign of what’s in store as AI is incorporated into all facets of life, from self-driving cars to virtual assistants. When the technology misfires, where the blame lies is open to interpretation. In March, U.S. criminal prosecutors let Uber Technologies Inc. off the hook for the death of a 49-year-old pedestrian killed by one of its autonomous cars.
In the hedge fund world, pursuing AI has become a matter of necessity after years of underperformance by human managers. Quantitative investors—computers designed to identify and execute trades—are already popular. More rare are pure AI funds that automatically learn and improve from experience rather than being explicitly programmed. Once an AI develops a mind of its own, even its creators won’t understand why it makes the decisions it makes.
“You might be in a position where you just can’t explain why you are holding a position,” said Anthony Todd, the co-founder of London-based Aspect Capital, which is experimenting with AI strategies before letting them invest clients’ cash. “One of our concerns about the application of machine-learning-type techniques is that you are losing any explicit hypothesis about market behavior.”
“It’s a beautiful piece of software that was written”
Li’s lawyers argue Costa won his trust by hyping up the qualifications of the technicians building K1’s algorithm, saying, for instance, they were involved in Deep Blue, the chess-playing computer designed by IBM Corp. that signaled the dawn of the AI era when it beat the world champion in 1997. Tyndaris declined to answer Bloomberg questions on this claim, which was made in one of Li’s more-recent filings.
Speaking to Bloomberg, 42.cx founder Daniel Mattes said none of the computer scientists advising him were involved with Deep Blue, but one, Vladimir Arlazarov, developed a 1960s chess program in the Soviet Union known as Kaissa. He acknowledged that experience may not be entirely relevant to investing. Algorithms have gotten really good at beating humans in games because there are clear rules that can be simulated, something stock markets decidedly lack. Arlazarov told Bloomberg that he did give Mattes general advice but didn’t work on K1 specifically.
Inspired by a 2015 European Central Bank study measuring investor sentiment on Twitter, 42.cx created software that could generate sentiment signals, said Mattes, who recently agreed to pay $17 million to the U.S. Securities and Exchange Commission to settle charges of defrauding investors at his mobile-payments company, Jumio Inc., earlier this decade. Whether and how to act on those signals was up to Tyndaris, he said.
“It's a beautiful piece of software that was written,” Mattes said by phone. “The signals we have been provided have a strong scientific foundation. I think we did a pretty decent job. I know I can detect sentiment. I’m not a trader.”