Hedge Funds Lost $125 Billion in 2022; Endotech CEO on How Science Can Help Them Recover

The markets weren't kind to hedge funds in 2022 – and if investors weren't paying attention, the media made sure they got the message. “Top hedge funds earned sharply less for clients in 2022,” “Hedge Funds End 2022 On A Sour Note,” and “Hedge funds set to mark worst returns in 14 years” read just some of the headlines.

While some investors might panic at such headlines, others take them in stride. After all, hedge funds are based on asset investments, and when assets have a bad year, they naturally lose value. And hedge funds have had some good years recently, too. And, if you invested with the right funds, you actually beat the market in 2022.

Most funds limited to educated guesses

In other words, if your fund managers made the right picks – also known as “guesses” - you made money. And if their predictions were off, you lost money. This, of course, doesn't mean that managers threw darts at a stock chart to make their choices; those choices were based on deep study of the specific sectors their funds specialize in, along with weighted opinions from veteran economists/experts/commentators/industry and government leaders, along with their own considerable experience and based on sound principles related to the investment models (industry, strategy, equity return, risk etc.) they prefer.

Hedge Fund managers, of course, did their due diligence – and yet, it still resulted in those negative headlines, as well as the dramatic differences in fund performance. Of course, managers of losing funds will point to a plethora of macro- and micro-economic issues that affected markets, skewing their insight – and they certainly have a point. But is there no other way? Are hedge fund investors fated to be subject to the blind vagaries of the market, with no opportunity to control outcomes? Is there no better way?

AI-based Quant Investment is a Game Changer

Well, in 2022, there was a better way – and that was with hedge funds that used quantitative analysis to build their investment portfolio. Unlike their investment model siblings, quant funds were up on average about 5% for 2022. Given the shellacking markets of nearly all assets took in 2022, that should be considered quite an accomplishment. 

But the real story isn't just in quant fund performance; it's how that performance came about, based on clear scientific, mathematical-oriented algorithms that give clear indications on how assets, markets, and even specific stocks are going to perform. And even though quant investing is nothing new, the way those investments are made – utilizing advanced AI and machine learning technology – is new.

AI systems can analyze events, expert opinions and analyses, trends and momentum, formulas (PEG ratios, VIX indices, etc.) and investment strategies, to name just a few – encompassing data that no human could have complete access to. Based on its findings, AI systems will construct a model that, when applied to quant investment strategies, will find the right investments for clients by bolstering the algorithms used by the quant fund.

AGI Goes Even Further

But that's just the beginning. As more advanced AI – known as artificial general intelligence (AGI) – systems will be able to change their models as new data comes in, enabling investors to change their strategies as needed. Thus, a quant fund that invested initially in high yield stocks, for example, could sell its holdings based on the new AGI-derived model, and divert investments to low volatility stocks. If the numbers and data add up, then investors will find their hedge funds beating the markets. 

“Follow the science” is a phrase we've applied to many issues in recent times, and there's no reason not to apply it to investing as well. Hedge fund investors – for whom even slight fluctuations in the market could be worth millions in profit or loss – need to consider alternatives to the “traditional” methods managers of their funds use to build investment portfolios. The experiences of 2022 don't have to be repeated in 2023, and beyond; by following the advanced data science that quant investing is based on, hedge fund investors can help ensure that market fluctuations put those millions in the plus column.