Giving visibility to the alternative investment sector: project funded by the SNSF

The project "What do Hedge Funds Think? Textual Analysis of Investor Letters", led by Prof. Francesco Franzoni, Full Professor at USI Faculty of Economics, aims to shed light on the often-overlooked alternative investment sector. This is achieved by analysing the communications between hedge fund managers and their investors.

The researchers, who secured funding from the Swiss National Science Foundation, will use Artificial Intelligence (AI) and Natural Language Processing (NLP) tools to analyse hedge fund communication letters, to identify the opinions and expectations of those involved in the investments, the key themes of the conversations, and how managers justify performance and investment decisions.

Professor Franzoni, how can the research you propose shed new light on the investment field?
"Our research provides unprecedented access to the communications of hedge fund managers, enabling a direct analysis of their perspectives on macroeconomics, equity markets, sustainability, and communication strategies. We overcome the limitations of the industry's lack of transparency by revealing previously unstudied information and decision-making dynamics. This approach offers new insights into how sophisticated investors operate and how they interpret and respond to economic policies. Ultimately, it contributes to a more productive dialogue among investors, policymakers, and the academic community."

What topics will you study specifically?
"We will focus on four main topics: the macroeconomic expectations of managers, especially regarding inflation and monetary policy; their perspectives on equities and stock-picking skills; their attitudes towards sustainable finance and climate risks; and finally, the communication strategies they use to explain performance and influence investor flows. By examining these areas, we can gain a better understanding of how managers make decisions, communicate with clients, and respond to changes in markets and economic policies."

Your project uses AI and NLP; what value do these technologies have for the investment industry?
"AI and NLP technologies enable the systematic and efficient analysis of large volumes of text, allowing for the extraction of informative signals that might otherwise go unnoticed. In our project, these technologies assist us in understanding the expectations and strategies of hedge fund managers through their communication letters. More broadly, they provide the investment industry with advanced tools to interpret market sentiment, anticipate reactions to events, and enhance decision-making. This represents a significant evolution in financial analysis."