How AI Can Be Used to Pick Stocks

Across the world, AI is quickly changing the way people and businesses operate. Now the hedge fund world is finding out if AI can be used to select stocks that will perform well.

Alpesh Patel, CEO of Praefinium, has been using Chat GPT to refine his method for stock selection. Patel conducted several experiments to test whether artificial intelligence could be beneficial in the hedge fund industry. And while he discovered that AI can’t predict which stocks will do well in the future, as reported by Business Insider, Patel did find that AI could “confirm your homework, and tell you something you might otherwise have missed based on the data you imputed…  (and) that getting the prompt right was one of the most critical steps.” 

While basic questions to Chat GBT elicited simple answers, further refining the questions helped the AI to generate more insightful answers. Unfortunately, AI is not the crystal ball we have all been waiting for, but Patel maintains that, “If you are willing to get the data, ask the questions and put it into something like this: you’ve got the stock picks, you’ve got the answers. You can basically replace a fund manager if you want”.

Hedge Fund Thinking Applied to Coral Reefs

Professionals who work in the world of finance understand that investing in a variety of assets can protect against loss due to market fluctuation, increasing the likelihood of favorable outcomes. Scientists who study coral reefs are now applying this kind of hedge fund thinking to determine how best to help coral reefs survive climate change.  

The Great Barrier Reef of Australia has been heavily damaged by rising ocean temperatures. If climate change continues, much of the coral will die out. Scientists are now in a race to save as much of the reef as possible. However, with more than 600 species of coral in the Great Barrier Reef, researchers with limited funding are unable to save them all. They must now figure out which types of coral are best suited to survive in the warming ocean and put all their efforts into protecting them. Coral geneticist Madeline van Oppen explained, “If a program only has funds to focus on 20 or 30 coral species, it will want to focus on the sets of species to get the most ecosystem bang for its buck”.

The researchers developed a two-pronged approach that determined which corals were most likely to survive, while also collecting and cataloging a variety of corals that are necessary to the overall functioning of the reef ecosystem. By comparing these lists, they narrowed the 600 species of coral down to 11 corals that are most likely to both endure and to provide ecological benefit in the future. By diversifying their approach and hedging their bets, these scientists have refined their approach to saving the reef.

Hedge Fund Founder Looks to Buy MLB Team

Gullane Capital Partners founder, Trip Miller, would like to be the next owner of the Tampa Bay Rays. Miller is gathering a group of investors in an attempt to purchase the team for $1.85 billion. He is hoping to invest $200 million, with additional investments coming from Tampa businessman Dan Doyle. Current principal owner of the Rays is Stuart Sternberg, who purchased the team for $200 million back in 2004.

According to Forbes, the Tampa baseball team is valued at $1.25 billion, which places it as 25th out of the 30 MLB teams. Their poor standing is largely due to their homefield, Tropicana Field, which is widely considered to have poor stadium economics. In 2022 the Rays earned less than $9 million from premium seating, and they averaged only 14,000 in home attendance, beating out only 2 other teams in the MLB.

Despite their poor attendance record, the Rays are known for their effective scouting and player development, which accounts for their 50-22 record despite having the fourth lowest payroll in major league baseball. If Miller successfully purchases the team, he will be tasked with building a new stadium in the near future, while continuing the team’s tradition of outperforming its payroll.

Quant Funds Prove Valuable to the Economy

Over the past year, quant funds, which use mathematical and statistical data to make investment decisions, have been buying stocks faster than ever before. Experts have determined that hedge funds that are driven by algorithms are more accurate than human analysts at detecting trends.

This increase in algorithm driven purchasing has helped the US stock market to rally despite pessimistic prognostications. Charlie McElligott, equity derivatives strategist at Nomura, explains, “These funds move fast and unemotionally. They’re not parsing through earnings or taking a view on the stickiness of inflation . . . this is about price trends and momentum.”

Representatives of Deutsche Bank have noticed that stock market exposure among active managers is at a low, but overall equities across systematic funds is on the rise, partially due to the rise in quant funds.  In spite of their positive influence on the market, quant funds still make up less than 10% of the hedge fund industry. Even so, they seem to have an oversized impact on the overall market. Deutsche Bank strategist Parag Thatte said, “We do see their trading has a big impact on equities, they don’t tend to lead the market . . . [but] they tend to amplify moves that are already happening.”

Increased Regulation of Nonbank Financial Institutions on the Horizon

The federal government is attempting to increase its oversight of nonbank financial institutions. Nonbanks are companies that do not have a full banking license or are not supervised by a banking regulatory agency.

President Donald Trump made it more difficult for the government to regulate nonbanks, however Treasury Secretary Janet Yellen believes that the Trump administration’s rules increased the potential for hazardous risk within the financial system.

Under President Biden, a group of federal regulators are now suggesting that nonbanks be designated as systematically important. This designation would make it possible for the Federal Reserve to supervise them more intensely.  The Financial Stability Oversight Council approved the proposal, which will now be open to public comment for the next 60 days.

According to Treasury Secretary Yellen, nonbanks such as cryptocurrency companies, hedge funds, and money market funds have the potential to endanger the economic stability of the country if they are not properly monitored.  This was demonstrated by the March 2023 collapse of Silicon Valley and Signature Bank. Yellen explained to the Wall Street Journal, “The authority for emergency interventions is critical. But equally as important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place”.

Investors are Optimistic About Crypto

London based Nickel Digital Asset Management recently commissioned a study of 200 institutional investors and wealth managers from multiple countries. 66% of respondents stated that in the next six months, they are planning to either begin investing or increase their investments in crypto and digital assets. This include 12% who say that they plan to ‘dramatically increase’ their digital investments.

The fact that investors are feeling confident about crypto investments cannot be taken for granted. Over half of those surveyed said their firms had reduced or sold their crypto holdings in the last half a year due to a long decline in valuations and market uncertainty.

According to hedgeweek.com, investors are even more optimistic when taking a longer term view of the sector. Only 17% of those surveyed said that crypto and digital assets was not an attractive sector for investors over the next five years, while 39% said it was very attractive, and 46% said it was quite attractive. Improved regulation and valuation recovery are the leading reasons behind this newfound confidence in digital investments, as 64% of respondents said that they expect significant improvements in the regulation of this sector, and 63% predict a bounce in pricing. 

Hedge Fund Investment in 2023

Are hedge funds a good investment for 2023? A number of experts are weighing in on whether world events like China’s hasty reopening from COVID and falling European gas prices will cause a recession, or if slowing inflation and rising interest rates will correct the problem. 

An international survey of 185 investors was inconclusive as to whether or not it was wise to put money into hedge funds at this time, given the instability in the market. 

Although commodity trading advisers (CTAs) returned a net of 16% in 2022, many who responded to the survey were not confident that this trend would repeat itself in 2023.

“People are at a crossroads on where to invest their money”, explained survey editor Marlin Naidoo. In 2022, approximately 30% of investors increased their investments in hedge funds, while 20% moved in the opposite direction. According to Reuters, many took investments from hedge funds that traded in stocks in order to invest in hedge funds that traded in bonds.  The responses to the survey reflect the different reactions that investors have in the face of all the uncertainty.

Investors might be convinced to continue contributing to hedge funds because they tend to perform better than other investments during times of higher inflation and higher interest rates. But at this point it is anybody’s guess what impact the events of early 2023 will have on the global economy.

High Cost Multi-Manager Hedge Funds Offer Large Returns

A Barclays note to clients recently explained that the fees for multi-manager hedge funds can be approximately three times the size of their peers, due to the fact that these funds dependably yield high returns.

The note indicated that while in the last five years the larger market has averaged a return of 5.5%, multi-manager hedge funds have averaged a return of 8.3%. Investors are, therefore, asked to pay a higher fee because they are very likely to receive a higher return. There are no fixed fees, rather the fees can rise and fall depending on the work of the traders. 

Generally, hedge funds have a fixed cost fee of 2%, with the fund owners taking 20% of the after cost profits. In multi-manager funds, the traders working at the fund receive bonuses, which are included in the hedge fund’s cost. This contributes to the higher cost, bringing multi-manager funds closer to a 7-and-20 charge instead of the usual 2-and-20.

According to Reuters, Barclays identified 42 multi-manager hedge funds managing a total of $290 billion in assets, including some of the world’s largest hedge funds.

Investors must pay performance related expenses even if the fund is not successful. They continue to pursue these funds, however, because of the consistently high returns which defray the increased costs.

 

Elliott invests multibillion-dollars in Salesforce

Elliott Investment Management has made a multibillion-dollar investment in Salesforce. Salesforce tripled its workforce over the past four years and purchased Slack in 2021 for $27.7 billion; the company also hired during the Covid pandemic. However, now Salesforce’s sales have slowed, leading to a period of layoffs and a deep stock market drop. Many of the executives have left the company, and Salesforce recently announced that it would be cutting 10% of its employees and reducing its real estate holdings.

Managing partner at Elliott explained about their investment,

“Salesforce is one of the preeminent software companies in the world, and having followed the company for nearly two decades, we have developed a deep respect for Marc Benioff and what he has built. We look forward to working constructively with Salesforce to realize the value befitting a company of its stature.” While Elliott has invested in many tech companies, it remains unclear what their goal is with their Salesforce investment. Their goals often lay in board representation and pushing for strategic inter-company changes.

Hedge Fund Debuts as Largest Woman-Led in Industry

SurgoCap Partners made history with its debut as the largest woman-led hedge fund internationally. Under its founder, Mala Gaonkar, SurgoGap Partners started trading on Tuesday, January 3, 2023 with $1.8 million under management. The SurgoCap firm will base its investments around areas in which technology can boost financial, industrial, and health care sectors.  

Gaonkar has an MBA from Harvard University and joined Lone Pine Capital as a founding partner in 1998. Before starting SurgoCap, she worked as one of three portfolio managers at Lone Pine from 2019-2022.

Gaonkar has incorporated her noteworthy use of technology for philanthropy into SurgoCap’s goals. Her past projects include co-founding the Surgo Foundation, which used AI and behavioral science to address health problems around the world. SurgoCap will put $100 million into smaller foundations, as well as nonprofits, that focus on climate change or serve underprivileged communities.