Machine learning’s influence over hedge funds will continue to grow, shaping trading decisions and portfolio positioning, while sustainable alpha opportunities are driving the industry to an inflection point, a new study by JP Morgan suggests.
Machine learning’s influence over hedge funds will continue to grow, shaping trading decisions and portfolio positioning, while sustainable alpha opportunities are driving the industry to an inflection point, a new study by JP Morgan suggests.
JP Morgan Asset Management’s second annual Global Alternative Outlook – which surveyed CEOs, CIOs and strategists across its USD146 billion alternatives platform – gauged a broad range of sentiment spanning hedge funds, private equity, real estate, private credit, and more.
The wide-ranging report says stock picking opportunities – stemming both from the accelerated use of machine learning techniques among investors and the continued tech disruption in a range of sectors – will underpin the broader investment landscape in 2020.
Specifically, the study identifies the adoption of artificial intelligence, the build-out of public 5G networks and the growth of cloud computing as fueling greater capital expenditure and demand for software and services. These, in turn, could potentially create a tailwind for manufacturers, supply chains and telecoms, spurring M&A activity – the lifeblood of event driven hedge funds – and expanding the range of complex datasets, which are used by systematic strategies.
“This macro backdrop informs hedge fund strategies as our managers anticipate a new generation of industrial applications and opportunities such as connected cars, the internet of things and smart cities,” JPM’s study observes.
“Statistical arbitrage managers apply machine learning techniques to the ever-increasing amounts of available data, producing unique alpha signals that drive returns. Those operating on shorter time horizons can often benefit from equity market volatility; the 2020 US presidential election and other uncertainties may increase the attractiveness of such a strategy.”
Meanwhile, investors are increasingly seizing on sustainability themes – both long and short – with environmental, social and governance (ESG) criteria becoming more fundamental to allocators beyond simple risk measurement.
“Investing in sustainability will be crowded, making manager selection crucial. Active investors will be able to take full advantage of the theme across industries, through long and short exposures in different asset classes,” JPM analysts say.
However, the survey observes that while 65 per cent of investors believe ESG will become more important in the next five years, just 37 per cent of fund managers agree – indicating a gap in sentiment between investors and managers on the sustainability theme.
Nevertheless, JPM maintains the hedge fund industry is “at an inflection point.”
“Our managers call the risk-adjusted returns from this type of investing ‘sustainable alpha’. Sustainability-led disruption was first seen in power generation in the shift from carbon-intensive fuels to wind and solar – the next sectors to experience it should include transport, agriculture, automotive, buildings and industrials.”
