Japan's Top Hedge Fund Is Setting Up an AI Lab in a Kyoto Temple

Japan's top-performing quantitative hedge fund is setting up an artificial intelligence research facility in Kyoto.

GCI Asset Management Inc., which manages $1.2 billion, aims to develop new investment models by bringing big data and artificial intelligence together in a temple it is refurbishing in Kyoto. Founder and Chief Executive Officer Hideki Yamauchi's goal is to replicate the success of the GCI Systematic Macro Fund, which has gained 36 percent this year to rank as the top performer among Japan hedge funds tracked by Eurekahedge Pte.

"Once you have a successful case, other young people will want to follow suit and that creates a virtuous cycle," said Yamauchi. "We want to develop a pipeline of talent by creating this lab."

Some of the biggest hedge funds worldwide are developing artificial intelligence tools, although firms using such technology are rare in Japan. Simplex Asset Management, which manages JPY 560 billion ($5.4 billion or roughly Rs. 30,003 crores), earlier this year opened its first fund that makes bets based on results derived from a self-learning computer program in a bid to beat the market.

A Eurekahedge gauge of 12 global AI-driven hedge funds has gained almost 7 percent this year, including a 1.8 percent advance during the Brexit-fueled market turmoil in June. That compares with an average 3.4 percent return for all hedge funds.

The lab will house two groups: the first will comprise as many as 10 people who have completed an automated-trading course, while the other will consist of students. The first team will develop and program investment models with top algorithmic traders, while the students will work with professors drawn from Japan's leading universities.

GCI will provide seed capital for the team whose model proves its potential through simulations and back-testing, or include the strategy in its existing fund, Yamauchi said.

The Kyoto project is mainly run by GCI Capital, a proprietary investment arm of GCI Group which GCI Asset Management is part of. GCI Asset Management will provide resources and support.

Yamauchi likens the temple, on the outskirts of the ancient capital of Kyoto, to a secret training facility in Japanese manga series ' Tiger Mask,' which was popular in the 1970s. The comic books tell the story of a professional wrestler who grew up in Tiger's Den, a hidden training ground located deep in a mountain where orphans are taught to fight.

"This is the investment management version of 'Tiger Mask,' a project like Tiger's Den," he said.

© 2016 Bloomberg L.P.