A group of quantitative hedge fund traders long dreamed of bringing their artificial intelligence strategies to all. And now they have with the first exchange-traded fund to combine the worlds of AI and blockchain.
The Innovation Shares NextGen Protocol ETF (ticker KOIN) began trading Tuesday. The fund tracks the Innovation Labs Blockchain Innovators Index. The gauge, which was created by Innovation Labs Ltd., uses "natural language processing" to scan news sources in order to determine sentiment and spot keywords so it can create a portfolio of as many as 60 stocks.
The idea behind the firms came from a conversation between hedge fund Pinz Capital Management LLC and ETF industry veterans including Matt Markiewicz, who's now the managing director of Innovation Shares. Their group was looking to democratize the use of AI and thematic trading.
"Our value proposition is that natural language processing and AI has been around for more than a decade in the hedge fund space," Andrew Kim, a shareholder in Innovation Labs and managing member of Pinz Capital Management, said in an interview at his New York office. "We are taking a product to the retail market."
KOIN is the first in what Kim hopes to be a series of AI-driven thematic ETFs. Here's how the index works – and how others may in the future: A proprietary AI algorithm determines a list of eligible companies based on market capitalization and liquidity measures, and then it scours news articles for keywords, company names and sentiment levels.
In the case of KOIN, a committee consisting of people in the blockchain and financial markets divide the eligible stocks into four categories: cryptocurrency payees, mining enablers, solutions providers and blockchain adopters. Companies are then ranked within their categories based on a sentiment score, and as many as 15 names from each are included in the index.
The ETF charges investors $6.50 for every $1,000 invested, just a bit cheaper than the two other blockchain funds on the market. It has only been trading for two days, but the fund is beating its blockchain peers, the Amplify Transformational Data Sharing ETF (ticker BLOK) and the Reality Shares Nasdaq NextGen Economy ETF (ticker BLCN). However, a deeper dive into their holdings show the funds aren't that different, with about half in tech names like Amazon.com Inc. and Intel Corp. and a quarter in finance firms.