Market Overview

Hedge Fund Mining Draws Ire; Is The 'Alternative-Data' Playing Field Rigged?

Hedge Fund Mining Draws Ire; Is The 'Alternative-Data' Playing Field Rigged?

Prior to the widespread availability of the internet, Wall Street insiders had a huge advantage when it came to access to information about public companies. Individual investors would often read about market-moving news in the newspaper the next day or in a company’s annual report once it arrived in the mail.

Today, market moving news spreads nearly instantaneously via online newswires and social media. Since most legal public data about a company are widely available on the internet and non-public inside information is illegal, hedge funds and other professional traders have turned to the use of “alternative data” to gain an edge.

This alternative data is information about a company that is non-financial in nature but nevertheless provides insight into the business activities of a company. Social media sentiment data are prime examples of alternative data.

The Financial Times’ Alexandra Scaggs recently highlighted the subtleties of alternative data.

“The information is proprietary – as in, a mom-and-pop investor couldn’t get the same thing – but it’s fine to trade on because it hasn’t come from the company , or from someone with a special confidential relationship to the company, like a banker on a deal,” Scaggs wrote.

Related Link: Wells Fargo Blasted On Social Media Following Fraud Settlement

Startups like Quandl sell alternative data to hedge funds for a hefty price. Some traders argue that data aren't truly public if only wealthy Wall Street funds can afford it. The funds themselves and the companies that compile the alternative data argue that the data is public if you have the sophistication and technology to collect and interpret it.

One thing seems certain: It’s getting harder and harder for financial professionals to gain an edge over retail traders. While most retail investors would say that’s good news, it makes it more and more difficult for funds to outperform.

So far in 2016, the IQ Hedge MultiQ Hedge Multi-Strategy Tracker ETF (NYSE: QAI) is up 2.3 percent, while the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 4.9 percent.

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