Hedge funds have long gotten bad press. Criticized for short selling, corporate agitation or destructive greed, their contribution to economic activity isn’t always clear. For as long as they have been around, they’ve been subject to scrutiny over the role they play in society relative to the value they extract.
Last week’s propulsion of DeepSeek to the top of Apple Inc.’s App Store charts puts a different slant on the popular narrative. DeepSeek shocked the world when it released artificial intelligence models that achieve similar performance to those currently available on the market at a fraction of the cost. While various aspects of the company’s story have drawn attention, one particularly notable detail stands out: It was incubated by a hedge fund.
That hedge fund, High-Flyer Asset Management, was set up in February 2016 by Liang Wenfeng and two of his classmates from Zhejiang University in eastern China. At its peak, the firm managed $12 billion of assets, deploying AI to identify and exploit inefficiencies in the domestic Chinese stock market. In 2021, Wenfeng wrote the preface to the Chinese edition of Gregory Zuckerman’s book, The Man Who Solved the Market, about Jim Simons and Renaissance Technologies – a firm he clearly admired.
For Wenfeng, though, it was always about artificial intelligence. In May 2023, he launched DeepSeek to develop a large-scale AI model. When asked in an interview why a quantitative fund would undertake such a thing, he answered that many core members of High-Flyer’s team come from AI backgrounds. “After exploring various applications, we eventually applied our expertise to the sufficiently complex financial domain,” he said. “General artificial intelligence may be one of the next great challenges, so for us this is a question of how to approach it, not why to attempt it.”
Finance is mostly seen as a way to fund innovation, yet it often also subsidizes innovation. This goes back a long way. Cosmologist Edward Kolb observes that although the telescope was immediately recognized as an important tool following its invention in 1608, its first application was in finance. “With the aid of a telescope, one could get the first glimpse of the ships and cargo coming into port, and obtain a crucial hour or so jump on the trading markets.”
Communication technologies have been subsidized by the finance industry ever since. In the early 19th century, the Rothschild banking family established a network across Europe to facilitate the flow of information, employing couriers to shuttle messages and agents to charter boats across the English Channel. In 1815, Nathan Rothschild was famously the first man in London to hear of Napoleon’s defeat at Waterloo.
Later, the finance industry became an early adopter of telegraphy. After a trans-Atlantic cable was laid in 1866, the first messages sent across it included a congratulatory note from Queen Victoria, news of Otto von Bismarck’s victory over the Austrian army – and cotton prices, which were quoted in both New York and Liverpool. The volume of messages transmitted by the finance sector helped the technology amass the scale required to bring down prices. The exchange rate between the US dollar and the British pound is still known as “cable” today.
Since then, the finance industry has spurred ever-faster communication links. In 2010, a new high-speed fiber optic cable opened to connect financial markets in New York and Chicago, cutting the round-trip communication time to 13 milliseconds from 16 milliseconds. The cost of the project was $300 million, but for the financial community it was worth it. When microwave technology advanced sufficiently to reduce transmission times further, the industry committed to it. Today, chains of microwave towers form a route that is 40% faster than the best fiber. Although expensive – infrastructure and operating costs are estimated to be around $500 million – latency improvements have beneficial applications across multiple industries.
In his 2011 novel, The Fear Index – about an AI-driven hedge fund that threatens to take over the world – author Robert Harris proposes a theory: He suggests that the cancellation of a project to build a superconducting Super Collider in Texas in 1993 (the “Desertron”) wiped out the career plans of a generation of academic physicists, who instead “had to go off and become quants on Wall Street, where they helped build derivatives rather than particle accelerators.” Harris thinks that was a shame. Yet, as Liang Wenfeng highlights, few sectors offer as complex a domain as finance to further new technologies.
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