Latest news with #U.S.SenateCommitteeonHomelandSecurityandGovernmentalAffairs
Forbes
27-03-2025
- Business
- Forbes
Is AI Technology The Biggest Risk For Hedge Fund Growth And Market Stability?
The U.S. Senate Committee on Homeland Security and Governmental Affairs is not at the top of anyone's list for hedge fund commentators but it does have serious views on the subject. Its report in June last year said that hedge funds use of AI and machine learning technologies to assist in trading decisions, which has been a practice by some for years, raises several concerns as this technology evolves, including the risk of inadequate disclosures to clients and the potential for increased threats to market stability.' It quoted the then SEC Chairman Gary Gensler's view that a financial crisis triggered by AI is 'nearly unavoidable' within the next decade and cited the May 2023 incident when an AI generated image of an explosion at the Pentagon led to a drop in stock market indices. Gary Gensler is gone and AI regulation in the new administration is certain to be lighter but the issue remains. Arguably, the biggest concern often raised by policymakers and regulators about AI in financial services is the use of GenAI and Large Language Models (LLMs) which are complex and nuanced, often with a lack of transparency with the underlying information used in generating a response that is used to make investment decisions. This is especially the case in the regulated financial services sector. The CFTC released Report on Responsible AI in Financial Markets, in May 2024, was authored by an independent Commitee of experts to facilitate an understanding of the impact and implications of the evolution of AI on financial markets with five recommendations to as to how the CFTC should approach this AI evolution in order to safeguard financial markets - regulating AI in financial services was not one of the recommendations. Commenting on the report, Commissioner Goldsmith Romero said, 'I herald the foundational, iterative approach of the Committee to recognize both that AI has been used in financial markets for decades, and that the evolution of generative AI introduces new issues and concerns, as well as opportunities." 'Herding' is often cited as a concern, where similar common models are used systemically important financial institutions or large cohorts of market participants, creating concentration risks, as pointed out in IOSCO's newly released member survey report, Artificial Intelligence in Capital Markets: Use Cases, Risks, and Challenges, though the report claims there is a lack of sufficient data in this specific area. The European Commission is consulting the industry on the use of AI in financial services with a view to regulating it, which is more the European way. Jack Inglis, ceo of The Alternative Investment Management Association (AIMA), says, 'A prescriptive approach to policy-making in this area could stifle innovation, placing European investment managers at a competitive disadvantage globally.' AIMA, which represents many hedge funds, stressed advanced technologies have been used in the sector for years 'to increase business and compliance efficiencies, but generative AI now offers new opportunities for enhanced efficiency gains.' Firms in the hedge fund industry, and across the financial services sector as a whole, invests heavily in their own technology, and in fintech and technology investments. After the Fed started rate cutting Goldman Sachs noted that hedge funds were buying technology stocks at the fastest rate for four months placing nearly almost three times as many long positions on the bet that information technology stocks would rise, compared to those with bets against them. That has of course changed since the start of the year and coinciding with the launch of DeepSeek. The Magnificent Seven or Mag7, now dubbed the Lag7, are down 16 percent so far this year. Markets being markets, there are claims now that Lag7 stocks are oversold. Goldman Sachs now says hedge funds are fuelling the biggest tech buying spree since 2021 with Clif Marriott in Goldman Sachs Global Banking & Markets saying, 'We think 2025 is going to be a breakout year for the number of tech IPOs globally.' The amount of capital invested in artificial intelligence is growing and similarly in cyber security, 'European tech has evolved immensely over the past decade,'add Marriott. Investment by hedge funds in technology for their own business operations as well as for their investors is a major issue and one that research from Beacon Platform Inc. has explored in depth in a new research report, Hedge Funds in 2024: Risks, Resilience, and Technology. Asset Tarabayev, chief product officer at Beacon, sums it up the report saying, 'Hedge funds clearly understand that data and systems integration are essential components of both risk visibility and competitive advantage.' The report from Beacon, a cross-asset portfolio analytics and risk management platform for multi-strategy hedge funds, contains some good news and some not so good news about hedge funds' use of technology. The good news is that institutional investors are predicting strong growth and attractive risk-adjusted returns in the hedge fund sector and are planning to back expansion with increased allocations. Almost all (93 percent) questioned expect an increase in fundraising by hedge funds of 10 percent or more over the next three years with 14 percent predicting growth of more than 20 percent. All institutional investors questioned believe investing in hedge funds will be attractive in terms of risk-adjusted returns over the next five years, with 17 percent describing it as very attractive. Data from Hedge Fund Research shows that at the end of 2024 total global hedge fund capital rose to an estimated $4.51 trillion, increasing $401.4 billion in the year. A major growth area has been crypto and blockchain with the HFR Cryptocurrency Index showing annualized returns of 51.4 percent and cumulative gains of 694.6 percent over five years. The not so good news is that, for all the investment in technology and talk of the use of generative AI and innovation, the research discovered the old ways have not gone away yet with 90 percent questioned saying their fund or department is wasting time with Excel spreadsheets and other manual activities. Almost all (92 percent) believe their system spends too much time on consolidating data from multiple sources while 81 percent say too much time goes in investment evaluation and 79 percent admit time is wasted on aggregating and measuring risk. Nearly three out of four (73 percent) say too much time goes into manual or spreadsheet-based analytics and 71 percent say this about trying to define P&L residuals. Kirat Singh, co-founder and ceo, at Beacon said: 'Excel spreadsheets clearly have a place in managing trading activity and risk management in the hedge fund sector, however, with so many saying that they are spending too much time on spreadsheets, there is a strong case for greater use of the available technologies. 'Leading funds are turning massive spreadsheets with millions of cells into cloud-enabled analytics, increasing the scale and speed of their analysis and decision making.' Technology and its use in risk management emerged as one of the biggest risks. Most institutional investors questioned (88 percent) agree that the quality of information and transparency in hedge funds needs to improve, with 22 percent saying it needs to improve dramatically. It is an issue that is costing hedge funds money. 85 percent of institutional investors questioned have decided not to invest in a particular fund because of concerns over its management of risk, and almost all (93 percent) think that this will be a growing trend. Almost all (93 percent) of senior hedge-fund executives questioned said risk parameters are becoming stricter at their firm in terms of what they can and cannot trade. Almost all (95 percent) say they are having to reduce or abandon trading in some areas because of the growing risks or because they don't have a good enough understanding of the risks in that area. Credit trading is the area hedge fund executives believe is most likely to be reduced or abandoned due to tighter risk parameters. Technology is the answer or at least a big part of the answer in helping to improve risk management. Almost all (99 percent) of hedge fund executives questioned say their fund will increase spending on risk management over the next two years. 90 percent questioned admit transparency provided to clients and investors must improve with 23 percent saying it has to improve dramatically. More than half (55 percent) say investment in technology is helping improve risk management and technology is seen as a source of competitive advantage across a range of factors. It is also a major factor making it easier to launch new funds with 60 percent of hedge fund executives questioned pointed to technology as a driver for growth in the number of funds. Technology is just about as important as being able to raise funds with 61 percent questioned indicating this. The research found launching a new fund is so popular that most hedge fund executives suspect colleagues are planning to quit and launch their own fund with 85 percent of senior executives questioned are concerned about a colleague launching their own fund. They just need the technology, which is becoming both cheaper to buy and build. Technology is central to the development of the hedge fund industry and will continue to be so for the foreseeable future, however it is often a tale of two domains from LLMs to spreadsheets. While the U.S. is focused more on voluntary guidelines for AI use in industries like financial services, the EU AI Act looks to be focused on comprehensive regulatory efforts, and classifying AI systems in high risk areas like financial services and healthcare. A good common ground for the hedge fund industry and policymakers and regulators is transparency - technology that delivers the transparency and outcomes that investors increasingly require will go some way to satisfying the drive to better oversight. The use of newer and greater technology monitoring systems to underpin financial stability would be a great and innovate breaththrough and improvement - physician, heal thyself. It is time that governments and regulators master this new and innovative technology to satisfy the monitoring (RegTech) and supervisory (SupTech) requirements in industries like financial services that are technology driven to meet the requirements of our complex society.
Yahoo
14-02-2025
- Politics
- Yahoo
D.C. Dispatch: Ernst praises DOGE, calls for USAID oversight
U.S. Sen. Joni Ernst spoke at a U.S. Senate Committee on Homeland Security and Governmental Affairs hearing Feb. 13, 2025, highlighting U.S. Agency for International Development expenditures she said were wasteful such as "reintegration bags" provided to migrants returning to Central American countries. (Photo courtesy of Sen. Joni Ernst's office) While opponents say actions taken by the U.S. Department of Government Efficiency, headed by billionaire Elon Musk, are unconstitutional, U.S. Sen. Joni Ernst defended Musk and DOGE in Congress this week saying these efforts are uncovering wasteful federal spending. Ernst is the DOGE Caucus Chair in the U.S. Senate and has been a key advocate in Congress for the advisory body. As protests have rallied against Musk and DOGE personnel's steps to shutter the U.S. Agency for International Development (USAID), after breaking into agency headquarters and telling employees earlier in February to prepare for administrative leave, Ernst said an investigation into how funds were appropriated by USAID was overdue. Ernst at a U.S. Senate Committee on Homeland Security and Governmental Affairs hearing Thursday pointed to areas of USAID funding that she said were examples of wasteful spending. She criticized expenditures like $27 million appropriated to the International Organization for Migration, a United Nations organization, for assisting migrants as they returned from the U.S. to some Central American countries. She said spending included 'reintegration bags' to migrants that had non-essential items like a Barbie doll, or nearly $69,000 for Battery Dance Corporation to hold 'Dancing to Connect' workshops in Wuhan, China, as a public diplomacy program. 'The question that we really should be asking at this point isn't why USAID's grants are being scrutinized, but why it took so long,' Ernst said. Ernst said she did not believe all groups receiving support from USAID were corrupt, but asked lawmakers to 'imagine how much more good work could be done' if funding was more appropriately allocated. Ernst sent a letter to Secretary of State Marco Rubio last week saying she has faced situations in years past where USAID has obstructed oversight efforts, writing 'it is of the utmost importance to conduct a full and independent analysis of the recipients of USAID assistance.' She said the American people support these efforts as shown through President Donald Trump's victory in the 2024 general election. 'Americans are no longer willing to tolerate a status quo where federal agencies, managing billions in taxpayer funds, pursue a counter-productive and potentially anti-American agenda abroad with no accountability,' Ernst wrote. 'I support the President's efforts to achieve government efficiency and rein in unelected bureaucrats. USAID is culpable for decades of unchecked, outlandish expenditures and that behavior must end now.' Multiple lawsuits are challenging DOGE, with some lawsuits seeking to curtail DOGE personnel's access to individuals' personal information through the U.S. Treasury's payment system while others say Musk's assertion of authority through DOGE, established via executive order, is unconstitutional because he was not appointed as a member of Trump's executive branch with approval from the U.S. Senate. In an interview with Fox Business News' Larry Kudlow Monday, Ernst praised Trump and Musk's efforts, saying DOGE and Trump's administration are working on issues she tried to tackle through her 'squeal' work finding areas to cut federal spending. 'Without this disruption, it would have been business as usual,' Ernst said. 'I would have gone on pushing out my squeal reports with nobody in the White House to really grab hold of it. So I'm thankful for the President. I am thankful that Elon Musk has taken on this additional duty on top of everything else he does to really focus on cost savings and efficiencies for our American taxpayers.' In the U.S. House, Reps. Zach Nunn and Ashley Hinson praised the passage of legislation they say will help small businesses struggling with new reporting requirements. Nunn introduced the 'Protect Small Business from Excessive Paperwork Act' in January. The bill revises requirements set in the 2020 Corporate Transparency Act requiring businesses to report beneficial ownership information in an effort to identify shell companies used by terrorist and criminal organizations. However, Nunn said surveys by the National Federation of Independent Businesses (NFIB) found that many small businesses never learned of the new reporting requirements that took effect on Jan. 1, 2024. According to the National Small Business Association, first-year compliance costs for the reporting requirements will cost the average small business owner nearly $8,000. A news release from Nunn said that as of Jan. 1, 2025, millions of small businesses that have not yet filed the needed reports are facing daily fines of up to $591 and up to two years in jail because of the requirements. The legislation introduced by Nunn will extend the filing deadline for these reports to Jan. 1, 2026 for small businesses and require the Treasury Department to educate businesses about the new reporting requirements. Nunn said the measure is necessary to protect small businesses that are facing major problems implementing these new 'red tape' requirements. 'Bureaucrats in D.C. sit in their ivory towers, demanding businesses comply with onerous red tape, without considering the burden it puts on businesses,' Nunn said. 'By passing this legislation, we're taking a step forward to roll back unnecessary regulations and simplify requirements for job creators while still adhering to the law.' The bill passed the U.S. House unanimously Monday. Hinson praised the bill's passage in a news release and called for further action to repeal the 2020 law, having cosponsored the 'Repealing Big Brother Overreach Act' to reverse changes made by the Corporate Transparency Act. 'It's past time to end the obsessive regulations on our small business community,' Hinson said in a statement. '… End the ridiculous paperwork and regulatory regime, unleash jobs and economic growth—it's that simple.'
