William Peter Hamilton, former editor of the Wall Street Journal, was a market timer extraordinaire. Hamilton's investment instincts beat the market by nearly 3 percentage points a year between 1930 and 1997. There's just one hitch--Hamilton died in 1929. His results are real, but he is not--at least not any longer.

Those sparkling returns were produced by a VirtualHamilton neural network--a branch of artificial intelligence whereby software programs "learn" through trial and experience--created by a team from New York University and Yale. The real Hamilton ran the Journal in the early 1900s, but the academics mined his writings to replicate the pundit's mind. They then fed the VirtualHamilton seven decades of market data to see how it performed.

Techies joke that AI is a technology that is supposed to make real computers act as they do in movies such as 2001: A Space Odyssey and last summer's A.I. Wall Street's AI can't yet match Hollywood's version of thinking, self-aware computers, but as much as $250 billion is currently being managed using sophisticated computer tools. These include neural nets, expert systems (investment acumen distilled into rules of thumb), and genetic algorithms (stock strategies digitally converted into cyberspace creatures that mutate and evolve like human DNA).

"We all have the same data, and the question is what the hell are we going to do with it," says Doug Case, chief investment officer at Advanced Investment Technology in Clearwater, Fla. Case sees AI as the key to decrypting high-velocity, information-saturated financial markets. "AI can deal with that data and handle these disorderly global markets," says Case, whose $1 billion firm is majority owned by State Street Global Advisors. There's even a chance that as AI filters down to amateur stock pickers (box, Page 24), the result may be warp-speed markets where using this technology will be a must. "In this escalating arms race, the humans with better information and more powerful AI tools will be able to fight the more competitive battle," says John Moody, a professor of computer science at the Oregon Graduate Institute and a hedge-fund manager.

"Skunk Works." At PanAgora Asset Management in Boston, researchers in the firm's advanced products division (nicknamed the "Skunk Works" as homage to the secretive Lockheed Martin unit that developed the Stealth fighter) have created a hedge fund where stocks are traded by a "virtual securities analyst." It uses an expert system to try to mimic human analysts by converting their smarts into a string of programmed if/then statements. (If a company's cash flow is less than the sector average, then the quality of that cash flow is low.) A summary of these statements then produces a buy/sell decision. "Real analysts think what they do is some sort of art, but it can really be reduced to rules," says Edgar Peters, the firm's chief investment officer. Why not just hire a real analyst? A human analyst can analyze only a small number of stocks. An AI analyst can cover them all--and without a fat expense account or million-dollar salary.

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