How Hedge Funds Are Profiting From Your Data

The Full Extent of How Your Personal Data is Being (Mis)used

You are going to the supermarket for groceries; on your shopping list, you have fruits, chocolate, and paper towels. While this is a simple purchase, the data gathered from this transaction is anything but simple.

This transaction creates a detailed dataset that includes your demographic profile, what you are buying, and where you are shopping.

The same customers who shopped that day will have their data aggregated with yours and turned into a report to be sold. So who’s the buyer? It’s likely to be a hedge fund.

Hedge funds are using this type of consumer data to get an information edge. Often consumers are not aware of how their everyday activities are being collected and fed through complex computer models that boost hedge funds’ alphas or returns in excess of market benchmarks.

Today we want to explore the full extent of how personal data is gathered and used by hedge funds.

Using Alternative Data In Finance

According to Wikipedia, “Alternative data (in finance) refers to data used to obtain insight into the investment process.”

82% of hedge funds of all sizes use alternative data in some capacity, and mutual funds, hedge funds, pension funds, and private-equity firms are projected to spend $1.7 billion on accessing alternative data in 2020.

Furthermore, 81% of hedge funds plan to increase their spending on alternative data, with the majority of these companies aiming to increase their budget from 11% to 25%. Across asset management companies, alternative-data budgets grew by 52% in the year from 2018 to 2019.

Alternative data includes data sourced from the internet. It can also include credit-card information as well as satellite data and sensor data.

For hedge funds, the most popular types of alternative data are consumer transaction data, social media data, and cloud-platform data, in that order. Web scraping and biometric data are also commonly used.

Gaining An Edge In Data

So how and why are hedge funds using this data? In a world dominated by low-cost passive investing or index funds, active investors are seeking new ways to gain an information edge over the market.

For example, investors are already leveraging satellite data supplied by the commercial space industry to analyze retail parking lots. Alternative data companies like Orbital Insight purchase thousands of these car park photos.

The photos are analyzed to generate data points like the number of cars parked. In turn, this is used to estimate sales volumes and company performance.

The data company then sells the information to a hedge fund. The faster this analysis is done, the bigger the hedge fund’s information advantage over those who are waiting for quarterly earnings reports to be released. More than 440 of these alternative data companies have entered the market to meet the explosive demand from investing firms.

Buying Your Data

Hedge funds are also buying data from your weather, data, ridesharing, and food-delivery apps to find out where you’re going every day. This geolocation information can be used to find out how many customers are visiting a specific retailer’s store each day, for more accurate retail sales forecasts.

With your banking apps, you might have agreed to give away your anonymized credit-card history for free and help the hedge fund boost its bottom line.

If you’re posting on your employer’s page on sites like Glassdoor, hedge funds could be using that qualitative information to gain insights about new product and service offerings from your employer. Alternatively, these reviews and comments could be scraped to identify signs of corporate distress.

Determining Your Shopping Habits

Your free email account might also be scanned for shopping receipts that ultimately help the hedge fund aggregate insights “into shopping habits,” which in turn help assess corporate performance.

Even social media comments about purchases can be scanned for brand insights and in turn company performance.

Hedge funds are using alternative data to complement their fundamental analysis and quantitative models.

In addition, turning staggering amounts of data from all kinds of sources into actionable insights has also been made possible by technological tools like machine learning, falling computational costs, and increased processing power.

Funds feed the aggregated information directly into their algorithmic trading models for faster, more detailed insights compared with traditional sources like government and company reports.

Final Thoughts

Given the rapid uptake of alternative data by hedge funds, alternative data may not be an alternative for long. However, one conspicuous question concerning legality remains. Insider trading regulations and personal privacy could be the key legal issues hedge funds need to be careful of.

As regulators play catch-up, hedge funds will need to closely monitor regulatory developments to ensure they’re compliant.

As for consumers, free apps and email accounts were never really free as these types of services are often provided on the condition your data can be collected for advertising targeting or other purposes.

Moreover, there’s no expectation of privacy in public spaces like car parks. As with the hedge funds, consumers looking to safeguard their interests should look to regulatory changes that could give them more control over opt-in and opt-out of data collection.