Hedge Funds Find an Edge With Big Data
Whenever my hedge fund met with a potential investor, they always asked the same question: “What’s your edge?”
After the routine overview of our prior track record and risk ratios, investors always wanted to know what separated us from the pack.
You see, hedge funds charge exorbitant amounts to manage money — the so-called 2 and 20 rate, which stands for a 2% fee on assets under management and a 20% performance fee on returns.
That’s why if you’re going to manage other people’s money, you had better be able to distinguish yourself from other managers competing for the same business.
Let’s face it, every investment manager reads the same newspapers and listens to the same conference calls. Historically, a portfolio manager’s edge has come from having better sources of information.
But in a world where information is readily available to everyone, it becomes difficult (if not impossible) to gain that essential edge.
That’s why investment managers are turning to Big Data and looking in unorthodox places to generate big returns.
The Era of Big Data Is Upon Us
In today’s communication age, it’s estimated that humans create 2.5 quintillion bytes of data every day. And that number is set to accelerate higher with the growth of the Internet of Things.
The age of Big Data has only recently arrived. Consider this mind-boggling statistic for a second: 90% of the world’s data was produced in only the past two years.
These data points can include items such as Google searches, Instagram likes and even geolocation data.
Here are some incredible figures that illustrate the enormity of Big Data:
- There are now 3.8 billion people with access to the internet.
- We have snapped and stored almost 5 trillion photos.
- There are over 40 million credit card purchases made per day.
- Google processes around 40,000 searches per second, or about 3.4 billion per day.
- Almost 5 billion videos are watched on YouTube every single day.
- Facebook users upload 300 million photos daily.
In the investment world, Big Data has become big business. Alternative data provides intelligence that is exclusive and relatively unknown to the rest of the market.
Where there is an edge in information, therein lies an edge in returns. Locating and sourcing this data for information trends can lead to that elusive competitive edge.
Nowadays, investment firms are rapidly increasing spending on these “alternative datasets.” JPMorgan Chase estimates that investors will spend between $2 billion to $3 billion on alternative data this year. And that spending is expected to grow between 10% to 20% a year.
There are now more than 1,000 alternative data providers. They charge between a few thousand to a few hundred thousand dollars per year. Just a few years ago, there were only about a dozen.
In September, the alternative data crowd went mainstream. Banking behemoth Citigroup started giving clients access to data collected and analyzed by Thinknum, which provides such reports as social media traffic, corporate job postings and product pricing.
Traditional data middlemen, like Bloomberg and FactSet, are starting to offer alternative datasets on their platforms. In some cases, they are building dashboards, making it easier for clients to access these data streams.
Want to see what consumers think of a public company’s brand? Alternative data provider Sentieo charges $500 to $1,000 a month and provides a combination of traditional data in the form of financial filings and alternative data, such as a company’s Instagram and Twitter engagement.
It allows users to chart both the revenue and social media engagement for public companies, with the assumption that increasing popularity leads to increasing revenues.
There are also a number of companies that track credit card purchasing behavior. Typically, this data starts at $10,000 a year and provides a daily or weekly report as to what stores and what items were purchased by the tracked credit cards. At this price point, it’s not for the retail investor.
Other “eye in the sky” companies such as Orbital Insight and Descartes Labs provide investors with satellite imagery of mall parking lots, commodity storage and infrastructure development.
Descartes even offers the ability to notify commodity traders as to what specific crops are being grown on farms. This information can be used to value agriculture.
The Bottom Line
Investment managers are always looking for their competitive edge. Finding that edge means staying ahead of the pack by sourcing information that no one else is tracking.
Alternative data can provide that edge. But as the industry gains popularity, and everyone starts using the same data, its impact on investment returns will be muted.
Perhaps the next place to find a competitive edge won’t be found where consumers have shopped, but where they are thinking of shopping.
Editor, Crypto Profit Trader