There’s a lot of back and forth in court papers over whether Li was misled about K1’s capacities. For instance, the machine generated a single trade in the morning if it deciphered a clear sentiment signal, whereas Li claims he was under the impression it would make trades at optimal times during the day. In rebuttal, Costa’s lawyers say he told Li that buying or selling futures based on multiple trading signals was an eventual ambition, but wouldn’t happen right away.
For days, K1 made no trades at all because it didn’t identify a strong enough trend. In one message to Costa, Li complained that K1 sat back while taking adverse movements “on the chin, hoping that it won’t strike stop loss.” A stop loss is a pre-set level at which a broker will sell to limit the damage when prices suddenly fall.
“Misrepresenation is about what a person said to you. What happens when we’re not being sold to by a human?”
That’s what happened on Valentine’s Day 2018. In the morning, K1 placed an order with its broker, Goldman Sachs Group Inc., for $1.5 billion of S&P 500 futures, predicting the index would gain. It went in the opposite direction when data showed U.S. inflation had risen more quickly than expected, triggering K1’s 1.4 percent stop-loss and leaving the fund $20.5 million poorer. But the S&P rebounded within hours, something Li’s lawyers argue shows K1’s stop-loss threshold for the day was “crude and inappropriate."
Li claims he was told K1 would use its own “deep-learning capability” daily to determine an appropriate stop loss based on market factors like volatility. Costa denies saying this and claims he told Li the level would be set by humans.
In his interview, Mattes said K1 wasn’t designed to decide on stop losses at all—only to generate two types of sentiment signals: a general one that Tyndaris could have used to enter a position and a dynamic one that it could have used to exit or change a position. While Tyndaris also marketed a K1-driven fund to other investors, a spokesman declined to comment on whether the fund had ever managed money. Any reference to the supercomputer was removed from its website last month.
Investors like Marcus Storr say they’re wary when AI fund marketers come knocking, especially considering funds incorporating AI into their core strategy made less than half the returns of the S&P 500 in the three years to 2018, according to Eurekahedge AI Hedge Fund Index data.
“We can’t judge the codes,” said Storr, who decides on hedge fund investments for Bad Homburg, Germany-based Feri Trust GmbH. “For us it then comes down to judging the setups and research capacity.”
But what happens when autonomous chatbots are used by companies to sell products to customers? Even suing the salesperson may not be possible, added Karishma Paroha, a London-based lawyer at Kennedys who specializes in product liability.
“Misrepresentation is about what a person said to you,” she said. “What happens when we’re not being sold to by a human?”