AI-powered mutual funds per se do not outperform the market, but significantly outperform their human-managed peers, show superior stock selection capability and can overcome some prevalent behavioral biases

Do AI-Powered Mutual Funds Perform Better? Rui Chen, Jinjuan Ren. Finance Research Letters, December 4 2021, 102616. https://doi.org/10.1016/j.frl.2021.102616

Highlights

• AI-powered mutual funds per se do not outperform the market.

• AI-powered mutual funds significantly outperform their human-managed peers.

• AI-powered mutual funds show superior stock selection capability and lower turnover ratios to humans.

• AI-powered funds can overcome some prevalent behavioral biases.

Abstract: We evaluate the performance of artificial intelligence (AI)-powered mutual funds. We find that these funds do not outperform the market per se. However, a comparison shows that AI-powered funds significantly outperform their human-managed peer funds. We further show that the outperformance of AI funds is attributable to their lower transaction cost, superior stock-picking capability, and reduced behavioral biases.

Keywords: Artificial IntelligenceMutual fund performanceBehavioral biasesJEL classification: G11, G23, G41