Will Hedge Funds Discover Gold in Data Mining?

The digital age created revolutions in a variety of industries, including the retail, banking, motion picture and music industries. The rise of alternative data vendors also holds the potential of a similar revolution in the hedge fund industry.

Hedge funds are always on the make for an edge in the markets and alternative data vendors are a promising source for just such an edge. Take the example of sportswear maker Under Armour. In early August, the company announced a second straight quarter of losses, trimmed its sales outlook, announced a restructuring plan and warned that 2017 operating profits would be down by 50 percent. While this was a shock to many of Under Armour’s investors, a select group of hedge funds had purchased data on the company from alternative data vendors—data that pointed to the company’s falling fortunes.

What Is an Alternative Data Vendor?

Alternative data vendors are firms that troll through the ocean of digital information churned out by people, companies and countries in the normal course of business and then refine it into useful intelligence.

In the Under Armour example, alternative data vendors detected a downturn in job listings on Under Armour’s website, a dip in the average price of its clothing and unfavorable reviews of its CEO by Under Armour employees at the recruiting site, Glassdoor.

It doesn’t take a hedge fund guru to see value in this type of data and, according to alternativedata.org, the number of providers has more than tripled since 2010 in response to demand.

Three Principal Types of Alternative Data

The first is website “scraping” by which vendors scrape public websites for information that might prove valuable. These scrapes range from the frequency of application downloads and the results of user reviews to airline and hotel bookings. Social media sites are tapped for insights into consumer trends and online purchases are monitored, to cite a few examples.

The second type is credit card tracking which shows definitively what consumers are buying.

Third, is the geo-location data provided by smartphones. This data provides invaluable insights into where consumers are shopping, eating and travelling.

The Downside

At this juncture, the alternative data industry is largely unregulated. Hedge funds are rightly concerned that information, which may appear to be public, is, in fact, private and therefore legally protected. Another area that is concerning to hedge funds is that the exclusivity of the information is essential to achieving the edge that hedge funds seek. Obviously, if every hedge fund has access to the information, no competitive advantage is in play. Unfortunately, exclusivity raises the antennae of regulators, opening hedge funds to a greater level of scrutiny, in what is already a grey legal area.

What about Hedge Fund Jobs?

Any innovation that holds the promise of enhanced hedge fund performance can only be positive for hedge fund jobs. It is no stretch to suggest that expertise in data analytics and other related disciplines will grow in proportion to the traction gained by alternative data vendors with the hedge fund industry.

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