"Hedge fund grade" Research - Sunshine and Profits

How AI has the superpower to give you unfair access to grow revenues

This is the first post in this series of how AI has given Hedge-fund like analytical superpowers to ordinary businesses.

The Golden-winged Warbler Bird: Nature's Storm Chaser Extraordinaire.

Imagine a little feathered friend, innocently perched on a branch. But this is no ordinary bird - it's the Golden Warburg, nature's own storm chaser. How does our avian hero know when a storm is brewing, sometimes even before the weatherman? Its superpower is sensing subtle shifts in barometric pressure and humidity levels, allowing it to flutter to safety well before the downpour. Just a 5-10 hPa dip in air pressure or 10% uptick in moisture over a short period of time, and its cue for the Golden Warburg to shift locations.

A real-life meteorological superhero, its unique instincts are nature's way of saying "Hey buddy, looks like there's a storm coming. Might be wise to get out of here!"

Let's switch gears from the avian world to finance.

Hedge funds

They may seem like mysterious, elite institutions accessible only to the wealthy. But peel away the veneer of exclusivity, and they operate based on some core principles that any business can learn from:

Exploitation of Asymmetries:

Secret Handshakes in Finance It's not just about having information; it's about what you do with it. They use a unique algorithm that scours through terabytes of unstructured data like satellite images of shopping mall parking lots, geo-located mobile data, weather patterns, and social media sentiment. This unconventional data acts as a crystal ball, predicting trends that standard financial reports fail to capture.

Risk Mitigation:

Math is the New Safety Harness. Hedge-fund uses advanced mathematical models to predict the probability of risk scenarios. They simulate thousands of possible market conditions using Monte Carlo simulations to assess how their portfolio will fare. This helps them balance risks and returns optimally. Let's say, they model the impact of a sudden 2% rise in interest rates, or the domino effect of an unforeseen bankruptcy of a large corporation, or even the ripple effects of a geopolitical event. They build these simulations and also reassess against the returns. It's a constant tug of war between the thrill of high returns and the caution of risk mitigation.

Event-Driven Strategies:

Riding Market Waves, some hedge funds invest based on catalysts like clinical trial results, product launches, regulatory rulings, and other anticipated events. They analyze the impact of these events on a company's fundamentals and stock valuations. By betting on near-term events with predictable outcomes, they aim to profit from the resulting stock price movements.

Contrarian Investing:

Some funds have learnt the Art of Being a Market Hipster. They follow a meticulous process of identifying undervalued stocks that the market has misunderstood or overlooked. They look for companies with strong fundamentals but temporary issues causing a dip in stock prices. Their bets are calculated and backed by deep research, not just intuition.

High Conviction Bets:

When All Eggs in One Basket Isn’t a Bad Idea Berkshire Hathaway doesn't just throw money at stocks; they bet big on few companies where they have utmost faith. The 'Oracle of Omaha', Warren Buffet, and his team spend countless hours researching companies, understanding their long-term value, and committing significant funds to these businesses. It's about the absolute belief in the resilience and potential of a company, even if it's momentarily out of favor in the market.

If you don’t know my fetish with the TV series Billions here’s one of the best clips of the season.

Let’s post some stickies on the wall.

How can these principles be applied for revenue growth ?

Clearly, these strategies may work but it sounds pretty data intensive and expensive (it does rhyme). How can modern day businesses deploy these to “build an edge”. Let’s revisit the principles.

1. Exploitation of Asymmetries: Imagine a sales team armed with AI software that can analyze unconventional data such as customer social media behavior, or even news sentiment for different industries, employee feedback on Glassdoor or competitive insights from product reviews. This information allows sales teams to predict potential customer behavior and demand predicts market trends. Is somebody building models to read through these data and generate competitive insights?

2. Risk Mitigation: Businesses can learn to simulate the risks with clients, vendors, relationships, alliances and employees. It is critical to keep reassessing these risk/ return tradeoffs. With advanced machine learning models, these risks can be quantified with a greater degree of accuracy. A classic example is understanding the risk of a customer churn and deploying meaningful strategy to retain them.
   
   Easier said than done, how do you account for the fall on margins or setting wrong precedents. This is where risk modeling comes in handy. At this high rate of change these are important skills to be developed in analytical teams.
   

3. Event-Driven Strategies: Riding Market Waves What are the big Catalytic events you can align your sales strategy to? Product launches, conferences, regulatory changes, funding news of your customer's company? Equip sales teams to detect these events and adapt tactics to ride the resulting waves of interest.
   
   For ex. it is critical to analyze - Which companies recently missed forecast. Which company hired a CDO, which companies are building capabilities in certain areas as evident from their job postings?

4. Contrarian Investing: Identify untapped or overlooked opportunities in business. Which customers are growing exponentially faster and would need a “higher tier focus”. Which relationships could lead to future business. What are the underwhelming product features that more relevant to solving customer problems. These are important questions to ask. With AI you can build models that can surface these insights in frequent exec discussions
   

5. High Conviction Bets: Identify the high value clients and technology trends. Invest in building capabilities with your clients. Make bold bets to drive the future.

   With Generative AI many companies are still operating at the surface. They are building a lot of marketing materials., but very few have the guts to build or train models. Invest in building the data infrastructure to realize the true potential of technology. One’s who do is clearly ahead.
   
   Microsoft’s move to invest 10 B was a game changer for a company which was way behind in AI capabilities. They recognized and pressed the leverage - extremely hard.

The principles powering elite hedge funds represent ideals any business should aspire towards—relentlessly gathering signals, simulating scenarios, and placing smart bets. Like the Golden-winged Warbler sensing an approaching storm, companies must learn to detect early changes in markets.

In the next series I will cover the use-cases and real-world applications of these principles in detail.

Until then, Que sera sera.

Notes

1. https://www.nationalgeographic.com/animals/article/141218-birds-weather-tornadoes-science-animals-environment#:~:text=A%20new%20study%20suggests%20that,noise%E2%80%94produced%20by%20the%20storms.