The Efficiency of Hedge Fund Strategies in the Pandemic Time

Sergey Okun  This “The Efficiency of Hedge Fund Strategies in the Pandemic Time” article was written by Sergey Okun – Financial Analyst at I Know First, Ph.D. in Economics.


  • Hedge Funds apply a wide range of investment strategies to get profit independent of market conditions
  • The fees model 2/20 is not dominant anymore in the hedge fund industry
  • I Know First provides portfolio strategies that significantly overperformed the S&P 500 from 2.5 to 5.5 times

Why Do We Need to Manage Money?

Money management tip's

One of the main functions of money is “the store of value” that allows overcoming the imbalance between needs and feasibility for their satisfaction at various stages of human life. Receiving money for the work done by a person and then spending it to pay for the services of another person are distributed over time. At the same time, money has a motivating function that encourages a person who currently has the necessary physical, psychological and mental capabilities to provide more services than they really need to meet their current needs, in order to accumulate financial resources to finance their future needs.  

Simple accumulation of money in a bank account is not a rational solution due to inflation. However, the modern financial market is ready to offer many investment tools based on the characteristics of risk and return. There are also various investment funds on the market that offer different investment strategies depending on the client’s qualifications and financial capabilities, such as a mutual fund, ETF fund, REIT, hedge fund and etc.

What do Hedge Funds Offer?

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Hedge funds typically have more flexible investment strategies than, for example, mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage, short-selling, and other speculative investment practices that are not often used by mutual funds. Because of using a wide range of investment strategies (part of them could have an extremely high grade of risk), only a person who could be recognized as an accredited investor can invest in a hedge fund. Also, a hedge fund can be not covered by some rules and regulations that are designed for investor protection. According to SEC, some hedge fund managers may not be required to register or to file public reports with SEC.

According to the data of FredEconomic Research, the value of financial assets under the hedge funds managements in the United States is $ 2,366,205 mln. in Q1 2021. The value of financial assets decreased by 9.3% in Q1 2020 (when the pandemic began), but in the next quarter, the value of financial assets came back to the pre-pandemic level.  

(Figure 1 – Total Financial Assets Level in the period Q4 2012 – Q1 2021)

The traditional hedge fund fees model is 2/20, where the 2% fee is charged on the assets under management regardless of the performance of the investments under the fund manager, and the 20% fee is only charged when the fund achieves a certain level of profit. The manager’s 2% fee covers the operating costs of the investment vehicle. The performance fee is only charged when the fund’s profits exceed a prior agreed-upon level. A common threshold level used is 8% (Hurdle Rate). That means that the hedge fund only charges the 20% performance fee if profits for the year surpass the 8% level. Most hedge funds include a watermark clause that states that a hedge fund manager can only charge performance fees after the fund has generated new profits. If the fund incurs losses, it must recover the losses before charging performance fees.

A.W. Jones was the first one who applied the traditional fees model of 2/20 more than 70 years ago. According to Barron’s, only 30% of Hedge Funds charge 2/20 fees today. In recent years, average fees have shrunk. In the fourth quarter of 2020, hedge funds charged an average of a 1.4% management fee and 16.4% performance fee. Usually, hedge funds offer alternative fees structures as 1/30 or 1/10/20 where hedge fund takes more fees when it achieved more investment return compared with the 2/20 structure.

(Figure 2 – Hedge Fund Fees Dynamic for the period 2008 – 2020)

Despite the high fees, a hedge fund can provide a high rate of return by using complex investment strategies. According to Insider Monkey, Alden Global Capital provides a 373.7% return for 1-year.  

  *Source: Insider Monkey
(Table 1 – The Best Performing Hedge Funds in the 2Q2021)

I Know First in the Hedge Fund Industry

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I Know First provides investment solutions for hedge funds with a competitive advantage utilizing our advanced self-learning algorithm. We provide an individual approach for our clients and help them in the process of stock selections based on their needs and preferences. Please visit our website for more details.

Also, I Know First provides active management activity. We utilize self-learning algorithm outputs to maximize our clients’ well-being. We provide a wide range of investment portfolios based on our algorithmic packages which can satisfy the needs and preferences of our investors. We are regularly publishing algorithmic performance reports and presenting the results of the live forecast performance evaluation for the different packages. Below you can see the performance of some of our portfolios compared with the S&P 500 benchmark.  

(Figure 3: The I Know First Investment Portfolios Results)

Market analysis by sectors allows us to determine the forces that lead the financial market and identify the most attractive investment areas at various stages of the economic cycle. The algorithm of I Know First tracks and provides forecasting for a broad range of sector ETFs to help our institutional clients construct an effective portfolio based on their sector preferences and investment periods from 3-day to 1-year horizons.

(Figure 4: The Sector ETFs Package performance in a 30 days time horizon for the period: from October 8, 2020 to November 9, 2021)

I Know First Algorithm – Seeking the Key &  Generating Stock Market Forecast

Basic Principle of the "I Know First" Predictive Algorithm

The I Know First predictive algorithm is a successful attempt to discover the rules of the market that enable us to make accurate stock market forecasts. Taking advantage of artificial intelligence and machine learning and using insights of chaos theory and self-similarity (the fractals), the algorithmic system is able to predict the behavior of over 10,500 markets. The key principle of the algorithm lays in the fact that a stock’s price is a function of many factors interacting non-linearly. Therefore, it is advantageous to use elements of artificial neural networks and genetic algorithms. How does it work? At first, an analysis of inputs is performed, ranking them according to their significance in predicting the target stock price. Then multiple models are created and tested utilizing 15 years of historical data. Only the best-performing models are kept while the rest are rejected. Models are refined every day, as new data becomes available. As the algorithm is purely empirical and self-learning, there is no human bias in the models and the market forecast system adapts to the new reality every day while still following general historical rules.


Effective money distribution in time has an important part in our life and the financial market can apply different instruments to maximize investor well-being. Hedge Funds can provide a significant expected return independent of current market conditions by using a complex investment strategy with short selling and derivatives. However, only an accredited investor can invest in a hedge fund for the reason that they have to understand the risk of applying derivatives. The hedge fund industry is a very competitive sphere that tries to utilize the last achievements in the artificial intelligence area, and I Know First is ready to provide effective investment strategies based on self-learning algorithm outputs.     

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Please note-for trading decisions use the most recent forecast.