AI and the Future of Hedge Fund Management

Artificial Intelligence technologies have become a crucial part to business success for almost all industries. We deploy AI as an assistant to help run some business activities and apply AI's intelligent algorithms to help make better decisions in businesses. AI can be even more beneficial to finance and hedge funds which run their business mainly on making careful investment decisions. Recently, many hedge funds have utilised AI algorithms to help them analyse data and make better financial decisions. Some use AI as an assistant with human supervision, while some are based entirely on AI, called Pure AI hedge funds.

Today, we will find out how hedge funds can utilise the ability of AI and the differences between using AI as an assistant and pure AI. Also, we will see if the use of AI helps increase the investment return.

AI tasks in hedge funds management

Fund managers need sharp analytical skills, a reliable investing style, decision-making skills, and accurate predicting skills. In this era, Big Data is a source for investment analysis. Humans are unable to process that much information at the same speed as AI does. That’s why AI comes into play. AI can help as follow:

1. Go through large amounts of data to find relevant information such as a company’s financial health, revenue, image market, and economic, social, and political situations. The purpose is to see whether it is worth investing in the company’s stock.

2. Analyse the data and come up with the right investment strategies, for example, ranking potential stocks. If AI is an assistant, humans will make the final decision. If the fund is a Pure AI fund, AI will make a decision right away.

3. Control risk, monitor changes, and find the sign that may cause any risk.

‘AI as an assistant VS Pure AI’ which one is better for hedge fund management in the Covid-19 era?

There are hedge funds that use AI as an assistant and ones that are pure AI. Traditionally, we need 6-7 fund managers for 10 funds, but with the help of AI, now just 1 manager and AI algorithm is more than enough for 10 funds.

AI is most beneficial to Quant funds, the funds that make predictions by calculating historical numerical data. AI assistant helps calculate and analyse data input by the fund manager. AI will find change patterns and predict the direction. Then, it will suggest the strategies, which the fund manager will make the final decision.

The Covid-19 pandemic has proved that the method described above may not always work. AI algorithms make predictions by analysing historical data, so it is not familiar with the pandemic because there have been no such things happening in the last few decades. The model can’t adapt to the situation on its own because it depends on human supervision.

Human supervision may sound safe. However, in this unfamiliar situation, giving AI the authority to decide might be a better choice. That’s why Pure AI funds perform better during the pandemic. It doesn’t need a human guide and can make a prompt decision with any activity.

AI used in Pure AI funds automatically update themselves every time they gather new information. This qualification is especially beneficial to the pandemic situation that is hard to predict. AI also goes through other information than numerical data, such as social media and using keywords to browse news. It helps AI to understand the market sentiment, which affects the overall direction of the market. As a result, Pure AI may be the answer for now and maybe for the future.

AI hedge funds' return

Since 2016, AI has been widely used in hedge funds. In 2018, the research indicated that more than 56% of hedge funds utilised AI. Preqin Pro's survey also shows that between 2018-2019, AI hedge funds have 29.96% total return while traditional hedge funds have only 23.87% return. The research in 2020 also shows that the total return of AI hedge funds between 2017-2020 has increased 34%.

During the Covid-19 pandemic, Pure AI hedge funds have better performance than expected. For example, Volt Capital Management AB, a Swedish Pure AI hedge fund, has a 24% total return in 2020, 14% more than expected. The funds are hundred percent managed by AI. They use AI to analyse economic modes, come up with strategies, and perform accordingly by themselves.

Project One is another Pure AI hedge fund that deploys AI to analyse market needs, gather information, and update itself automatically. Project One CEO even said that if other funds don't consider using AI, they won't survive in the future.

Next Alpha is also a hedge fund that lets AI make their own decisions with any investment activity. They also use a system called Accern, which allows AI to access news and social media information. So, AI can create a better and more accurate model. Between 2019-2020, Next Alpha's return increased by 40%.

However, please be reminded that even though applying technologies with investments seems promising, all investments involve some degree of risk. You should learn your limitations and make a careful decision with any investment. If you are sure, do not forget to consider AI hedge funds!