Could a Trade War Present an Opportunity for AI to Showcase its Worth for Hedge Funds?

Trade wars are generally bad news for markets, and traders struggle as their judgments are clouded by tariffs and retaliatory measures that can adversely affect the value of their positions. However, a macroeconomic environment that’s punctuated by aggressive trading sanctions may be an opportunity for AI models to show their value.

According to Franklin Templeton, equity securities are vulnerable to trade wars with their prices prone to fluctuations and the loss of principle. In particular, small and mid-cap stocks can struggle amid greater risks and volatility compared to larger capitalization stocks.

Likewise, fixed-income securities can be affected by uncertainty among interest rates, credit, inflation, reinvestment risks, and the possible loss of capital. Because tariffs are inflationary by nature, combative interest rate hikes by the Fed can prompt the value of fixed-income securities to fall.

JP Morgan data states that US trade policy uncertainty has reached a historic high, far surpassing the volatility experienced at any other stage in the past 40 years.

The investment bank suggests that policy documents, executive orders, and public statements by the Trump administration point to a significant change in America’s trading relationship on the world stage.

For hedge funds, market uncertainty can be an opportunity in the pursuit of alpha. However, clouded outlooks call for a more robust approach to identifying opportunities and capitalizing on them faster than their competitors.

With the news that Minotaur Global Opportunities Fund, consisting of a fully AI-powered portfolio, achieved a 13.7% return in its first six months to January 2025, doubling the performance of its benchmark, the MSCI All Country World Index in the process, artificial intelligence could be a key solution to navigating a prospective trade war for hedge funds.

How do Trade Wars Impact Markets?

We can look to history to better understand the impact of the Trump administration’s use of tariffs on markets.

During the tariff wars that were initiated during Trump’s first term, US equities markets saw greater levels of volatility as performance was dictated by news on trade talks and the future of the tariffs in place. This, according to Invesco, led to more investors embracing ‘safe haven’ assets on a global scale.

In instances where tariff talks broke down or additional trade tariffs were applied, US stocks experienced sell-offs. On the other hand, when optimism surrounding trade deals improved, stocks generally rose.

When the Phase I trade deal was announced in October 2019, stocks rallied. While tariffs contributed to a 4.38% contraction in the S&P 500 in 2018, the clearing outlook led to 31.49% gains in 2019. Similar patterns could be found in the China A Index over the same period.

What does this mean for Wall Street during Trump’s second term? Given that the President is seeking to implement a protectionist approach to the US economy, we can expect the volatility experienced in 2018 and 2019 to be more pronounced should tariffs continue to be used as a bargaining chip on the world stage.

For hedge funds seeking to outmaneuver markets to take advantage of the volatility of trade wars, it’s worth looking at how AI can help leverage more decisive, data-driven actions.

The Value of AI

Minotaur Capital, which is an investment firm based in Sydney, Australia, has sought to cut costs using artificial intelligence, with founder Armina Rosenberg suggesting that it’s around ‘half the price’ to operate in terms of cost versus a junior analyst salary.

Crucially, its large language model (LLM) framework consumes around 5,000 news articles daily and can deliver 2,000-word reports on just about any global stock that it believes has the potential to double its value in three years or tenfold over the next decade.

Given the chaotic nature of trade wars, this ability to consume breaking news at scale and use it to deliver comprehensive reports means that AI can help hedge funds navigate uncertainty far more efficiently than human analysts. This can be a particular advantage at a time when markets can react differently to emerging news on a daily basis.

While Minotaur is a use case where AI appears to be outperforming benchmarks in a fully autonomous environment, Liming Zhu, a professor at the University of New South Wales, believes that the best outcomes for the technology come from environments with bottom-up experimentation and deep human expertise.

This calls for prime services for hedge funds that can tailor products to the individual needs of hedge funds that can turn to embedded AI to improve their actionable market insights.

This means that firms can interpret forecasts as probabilistic, and make measured risks based on educated judgment calls from structured and unstructured data.

Optimizing Agility

Fundamentally, the incorporation of AI and its measured outcomes helps hedge funds to act with agility in the face of market uncertainty.

Although trade wars can cloud the macroeconomic outlook for US equities and investment opportunities throughout the rest of the world, artificial intelligence tools can turn risky market conditions into an opportunity to make moves that other institutions have failed to identify, opening the door to alpha even as investor sentiment struggles for momentum.

The artificial intelligence boom has been rapidly building momentum on Wall Street, and for its hedge fund adopters, a prospective global trade war could be an opportunity to test its capabilities. As Minotaur has shown over the past six months, the reward for the most sophisticated AI model could be seismic.