The world is too complex for AI to pick your stocks, a hedge fund quant says

• A top hedge fund quant says ChatGPT just isn't ready to pick stocks like a real investor.
• Gappy Paleologo warned AI still can't match the gut instincts and context humans bring to investing.
• Some say Wall Street's big bet on AI might be getting ahead of what the tech can actually do.

The dream of letting ChatGPT build your investment portfolio may still be far off, according to one of the hedge fund world's top quant minds.

Gappy Paleologo, a partner at Balyasny Asset Management and a veteran of firms like Citadel and Hudson River Trading, said large language models like OpenAI's ChatGPT lack the real-world grounding needed to make serious investment decisions.

"The decision to invest in a particular stock is a very demanding cognitive function, and I don't see that really being replicated very well," Paleologo said on Bloomberg's "Money Stuff" podcast.

Despite the hype surrounding AI in finance, Paleologo argued that machine learning models are still disconnected from how investors experience companies through direct observation, human conversation, and a holistic understanding of industries and people.

"Our inputs are much more complex than just a string of text or YouTube videos," he said. "An investor has a fundamentally different experience of a company than an LLM that has an experience that is mediated by multiple layers of processing."

While AI may be able to handle baseline tasks like replicating a researcher's writing style or summarizing earnings calls, Paleologo remains skeptical of its ability to generate conviction around trades.

The human edge, in his view, is still rooted in messy, real-world intuition.

That is not to say AI won't change the game. He said he expects large firms like Bloomberg to roll out advanced prompt-based tools that replace traditional terminals, allowing investors to interact with data more naturally.

"This is going to happen in one form or another," he said. " But I don't think AI is that smart also. So I think that having a baseline system would be already pretty good."

AI dreams meet economic reality

Paleologo's caution comes as Wall Street is increasingly betting on AI to fuel the next wave of stock market growth.

Tech stocks, especially in the AI space, have soared since ChatGPT's launch in 2022, with the Magnificent Seven — Apple, Amazon, Alphabet, Meta, Microsoft, Tesla, and Nvidia — now making up roughly one-third of the S&P 500's total market value.

But that optimism is meeting resistance. Market strategists like Callie Cox have warned that the AI trade could hit a wall amid rising tariffs, inflationary pressure, and slowing consumer demand.

Others have drawn historical parallels to the dot-com bubble. Richard Bernstein, chief investment officer of the $15 billion investment firm Richard Bernstein Advisors, said the AI mania is "eerily similar" to the overhype of internet stocks in the late 1990s.

As Paleologo sees it, AI may eventually integrate into investors' toolkits, but for now, it still lacks the sensory, intuitive, and contextual capabilities that define truly strategic investing.