7 ms·

I understand a lot of the top performing hedge funds operate via insider information.

osrec 9y ago
This is sometimes true, and in my opinion, happens more at the smaller, unregulated hedge funds where the volumes can go undetected.
dsacco 9y ago
Is your understanding that they operate via illegal insider information, or access to information that is very difficult to achieve? To be clear: I have mined and sold data to hedge funds before, including well known ones, and from that work I derived two conclusions: 1. It is fundamentally possible to beat the market consistently and legally by exploiting information asymmetry, and 2. Most hedge funds, especially the most successful ones, do not operate via illegal insider information (and will, in fact, fly into a compliance department initiated lock down on a security if, say, an overzealous data vendor compromises confidentiality). Basically, I'm asking for clarification because as stated, I disagree with your assertion here. There are legal grey areas and some people are outright criminal, but overall I wouldn't characterize the top performing funds as being wholly or even close to partially dependent upon insider information, let alone at a systemic organizational level.
- hellogoodbyeeee 9y ago
  > I have mined and sold data to hedge funds Are you able to tell more about what types of data this was? I'd be interested in hearing more. I love the story of hedge funds using satellite imagery of parking lots to predict retail store strength
  - dsacco 9y ago
    > Are you able to tell more about what types of data this was? I mined data in the real estate, QSR, automotive and airline sectors (and a few peripherally related ones). We would identify a source of data that was a demonstrably strong proxy for a specific company's revenue (that is to say, if we broke out a naive timeseries of the data it would map nearly 1:1 to earnings results each quarter). Then we would collect this data en masse, writing software over a custom crawler and infrastructure, bespoke to each case. During ingestion we'd process and normalize the data and dump it in a database. Once we had a significant amount of data we'd build a forecasting model, which could be very straightforward ("how many products have they sold this quarter", for simpler companies) to very complex ("can we reverse engineer the amount of business which is now online" or "can we determine the undisclosed amount of business being done in this specific region"). This analysis (and not the data itself) constituted the product - we never even provided the data directly to the hedge funds. Once the crawling and analysis was mature, we'd incubate it for a few quarters while building interest; then, after showing a very strong mapping over several quarters, offer it as a data product. It was not uncommon to achieve <5% or even <1% margin of error for forecasting earnings announcements on a quarterly basis. The data was always public and legal, though challenging to identify and difficult to effectively crawl. It was typically derived from very uncommon sources, and would range in complexity from the extremely simple ("we can crawl sequentially incremented integers from this third party that appear to map to products sold by this company") to the very sophisticated and complex (e.g. "we've collected a zero sum distribution of ad partners and their spend on the network, are more partners churning off, and is this a better or worse outcome for the company?"). I've spoken about this in comments here before. This is still very doable, and I still do this sort of work for personal research (and profit). However, the work I do is now much more quantitative - I'm currently taking a similar approach for baskets of equities with the goal of forecasting macroeconomic trends (e.g. subprime auto loans) instead of the earnings results of individual equities. To give a very specific throwaway example (because it doesn't violate an NDA and it no longer works): it used to be possible to pretty accurately forecast large tech retailers' product sales each quarter (like Apple) by reverse engineering FedEx and UPS tracking numbers.
    - defen 9y ago
      > it used to be possible to pretty accurately forecast large tech retailers' product sales each quarter (like Apple) by reverse engineering FedEx and UPS tracking numbers. That's great. Were tracking numbers vendor-specific in some way? So you could, let's say, order an iPhone once a week and get an idea for how many iPhones (or total Apple products) were sold in that time period, just by using the tracking numbers? Was it dependent on geography in some way?
      - dsacco 9y ago
        Yes, yes, no.
        WalterBright 9y ago
        Reminds me of the British figuring out how many tanks the Germans made in WW2 by a sampling of the serial numbers.
        rmc 9y ago
        That's genius! But then you have to buy a lot of iPhones, right? I suppose you can sell them on, and if you're getting ~$10k per quarter, it's OK. Or did you use a different approach? What changed BTW? Did the format of tracking numbers change?
        falsedan 9y ago
        > But then you have to buy a lot of iPhones, right? Just two per carrier would do: one at the start of the quarter, and one at the end. Earnings dates happen weeks after the quarter ends, so you'd have heaps of time to peddle your analysis around.
    - opportune 9y ago
      Would you be able to describe how your data was normally priced? I'm sure it is very context dependent, but I'm very interested. For example, let's say you have information that allows you to forecast the earnings of a publicly traded company to within 1% MoE; for how much could you sell this information (either one time, or periodically) to a financial company? I once briefly chatted with a man who ran a company that used satellite imagery to predict crop yields. I found it amusing how rather than providing this information to farmers ("It looks like you're going to produce only 60% of what you did last year, time to cut some expenses!"), there was so much more money in providing this information to hedge funds and trading firms. Morality aside, the potential for technology like this is exciting. It's kind of cool how the combination of big data, scraping, statistics, etc. allows this small niche of analytics to thrive. I have a decent background in most of these subjects, and this seems like a very freelance-able job, so I'd love to dabble in this area and learn how it works.
- bhouston 9y ago
  I base my comments on stuff like this: https://www.ft.com/content/efda2ca2-ec69-11e6-930f-061b01e23655 https://www.ft.com/content/efda2ca2-ec69-11e6-930f-061b01e23... https://www.nytimes.com/2016/01/09/business/dealbook/sec-and-steven-cohen-reach-settlement-in-insider-trading-case.html https://www.nytimes.com/2016/01/09/business/dealbook/sec-and...
smt88 9y ago
I used to work on Wall St, and nearly every hedge fund was a client of our company. This is absolutely true.
- jzwinck 9y ago
  There is no single Wall Street vendor who has nearly every hedge fund as a client, unless perhaps you are talking about a major exchange like NYSE. Even that is probably not a valid because of the huge number of firms doing smaller volumes via third parties (and having no direct relationship with the exchange). Or perhaps you worked at Reuters or similar, in which case you would not have much visibility into the funds. So are your two sentences related in any way?
  - pliny 9y ago
    He worked at Starbucks and would overhear traders bragging about their crimes in queue.
    - smt88 9y ago
      My understanding is that trading on non-public info isn't a crime unless both parties benefit. The behavior I'm referring to was sharing tips with the expectation of getting tips in return at a later date. As far as I know, it's not possible to prove that's illegal. Also, it's not like actual illegal behavior is uncommon when it's hard to prove, and it's not like a lot of people aren't proud of it. Watch Jim Cramer's interview with Jon Stewart as an example and the reaction to Wolf of Wall Street as another. In business school, a friend asked me to recommend firms where he could do some quiet insider trading by tipping off relatives who would trade on his behalf. He ended up at MF Global. There aren't statistics on this kind of thing, but my experiences have all told me succeeding as a hedge fund requires breaking the same rules as everyone else, not unlike doping in pro sports.
      - poooogles 9y ago
        >My understanding is that trading on non-public info isn't a crime unless both parties benefit. Trading on non public information for a gain is going to land you in hot water with the SEC. These two lines on the SEC site [1] define this. >Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; >Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information 1. https://www.sec.gov/fast-answers/answersinsiderhtm.html https://www.sec.gov/fast-answers/answersinsiderhtm.html
sytelus 9y ago
You cannot perform above average without an information asymmetry. This asymmetry may be either because you found "bug" in financial system or insider information or custom data collection. The test for "good" funds is essentially what information asymmetry they have. If their answer is "good fund managers", "years of experience", "past performance" etc then it's not concrete asymmetry and most likely won't work over longer term.
- valuearb 9y ago
  Buffett clearly disproves this theory. The reason is it's ignoring the overwhelming impact of bias and mal-incentives. Hundreds of thousands of investors have professional training in valuation techniques Buffett uses. But 99% don't make the same use of that skill as Buffett does, for reasons that include 1) they can't buy in to using valuation as their sole investment criteria. They want to be "smarter", thinking they can see things others can't using psychology or charts or other pseudo sciences. 2) They fall sway to Mr Market ( read the Ben graham parable). 3) They can't sell value to clients and only want a strategy clients will pay for. 4) Buffett spends a great deal of time trying to make decisions free of bias. A CFA program teaches you nothing about this, but it's critical to good valuation work. For example, WEB does not want to know the stock price of a company he's analyzing until he's made his valuation estimate. He doesn't want to be biased into giving a too high valuation to a company he loves just to ensure he can buy it. Lastly, there is a meta level to value investing. A great valuation at a current price isn't enough if the company lacks a competitive moat, or management can't be trusted to treat shareholders well. First level cigar butt value investors never learn this.
  - lootsauce 9y ago
    Or perhaps Buffet has an information asymmetry. Don't you think when he is interested in buying a company that may not even be in the public market that the meetings, tours of facilities and financial due diligence represents a significant information asymmetry. This information is probably available to any who seek it but not practically to most.
    - 9y ago

This is sometimes true, and in my opinion, happens more at the smaller, unregulated hedge funds where the volumes can go undetected.

dsacco 9y ago

Is your understanding that they operate via illegal insider information, or access to information that is very difficult to achieve? To be clear: I have mined and sold data to hedge funds before, including well known ones, and from that work I derived two conclusions: 1. It is fundamentally possible to beat the market consistently and legally by exploiting information asymmetry, and 2. Most hedge funds, especially the most successful ones, do not operate via illegal insider information (and will, in fact, fly into a compliance department initiated lock down on a security if, say, an overzealous data vendor compromises confidentiality). Basically, I'm asking for clarification because as stated, I disagree with your assertion here. There are legal grey areas and some people are outright criminal, but overall I wouldn't characterize the top performing funds as being wholly or even close to partially dependent upon insider information, let alone at a systemic organizational level.

hellogoodbyeeee 9y ago
> I have mined and sold data to hedge funds Are you able to tell more about what types of data this was? I'd be interested in hearing more. I love the story of hedge funds using satellite imagery of parking lots to predict retail store strength
- dsacco 9y ago
  > Are you able to tell more about what types of data this was? I mined data in the real estate, QSR, automotive and airline sectors (and a few peripherally related ones). We would identify a source of data that was a demonstrably strong proxy for a specific company's revenue (that is to say, if we broke out a naive timeseries of the data it would map nearly 1:1 to earnings results each quarter). Then we would collect this data en masse, writing software over a custom crawler and infrastructure, bespoke to each case. During ingestion we'd process and normalize the data and dump it in a database. Once we had a significant amount of data we'd build a forecasting model, which could be very straightforward ("how many products have they sold this quarter", for simpler companies) to very complex ("can we reverse engineer the amount of business which is now online" or "can we determine the undisclosed amount of business being done in this specific region"). This analysis (and not the data itself) constituted the product - we never even provided the data directly to the hedge funds. Once the crawling and analysis was mature, we'd incubate it for a few quarters while building interest; then, after showing a very strong mapping over several quarters, offer it as a data product. It was not uncommon to achieve <5% or even <1% margin of error for forecasting earnings announcements on a quarterly basis. The data was always public and legal, though challenging to identify and difficult to effectively crawl. It was typically derived from very uncommon sources, and would range in complexity from the extremely simple ("we can crawl sequentially incremented integers from this third party that appear to map to products sold by this company") to the very sophisticated and complex (e.g. "we've collected a zero sum distribution of ad partners and their spend on the network, are more partners churning off, and is this a better or worse outcome for the company?"). I've spoken about this in comments here before. This is still very doable, and I still do this sort of work for personal research (and profit). However, the work I do is now much more quantitative - I'm currently taking a similar approach for baskets of equities with the goal of forecasting macroeconomic trends (e.g. subprime auto loans) instead of the earnings results of individual equities. To give a very specific throwaway example (because it doesn't violate an NDA and it no longer works): it used to be possible to pretty accurately forecast large tech retailers' product sales each quarter (like Apple) by reverse engineering FedEx and UPS tracking numbers.
  - defen 9y ago
    > it used to be possible to pretty accurately forecast large tech retailers' product sales each quarter (like Apple) by reverse engineering FedEx and UPS tracking numbers. That's great. Were tracking numbers vendor-specific in some way? So you could, let's say, order an iPhone once a week and get an idea for how many iPhones (or total Apple products) were sold in that time period, just by using the tracking numbers? Was it dependent on geography in some way?
    - dsacco 9y ago
      Yes, yes, no.
      - WalterBright 9y ago
        Reminds me of the British figuring out how many tanks the Germans made in WW2 by a sampling of the serial numbers.
      - rmc 9y ago
        That's genius! But then you have to buy a lot of iPhones, right? I suppose you can sell them on, and if you're getting ~$10k per quarter, it's OK. Or did you use a different approach? What changed BTW? Did the format of tracking numbers change?
        falsedan 9y ago
        > But then you have to buy a lot of iPhones, right? Just two per carrier would do: one at the start of the quarter, and one at the end. Earnings dates happen weeks after the quarter ends, so you'd have heaps of time to peddle your analysis around.
  - opportune 9y ago
    Would you be able to describe how your data was normally priced? I'm sure it is very context dependent, but I'm very interested. For example, let's say you have information that allows you to forecast the earnings of a publicly traded company to within 1% MoE; for how much could you sell this information (either one time, or periodically) to a financial company? I once briefly chatted with a man who ran a company that used satellite imagery to predict crop yields. I found it amusing how rather than providing this information to farmers ("It looks like you're going to produce only 60% of what you did last year, time to cut some expenses!"), there was so much more money in providing this information to hedge funds and trading firms. Morality aside, the potential for technology like this is exciting. It's kind of cool how the combination of big data, scraping, statistics, etc. allows this small niche of analytics to thrive. I have a decent background in most of these subjects, and this seems like a very freelance-able job, so I'd love to dabble in this area and learn how it works.
bhouston 9y ago
I base my comments on stuff like this: https://www.ft.com/content/efda2ca2-ec69-11e6-930f-061b01e23655 https://www.ft.com/content/efda2ca2-ec69-11e6-930f-061b01e23... https://www.nytimes.com/2016/01/09/business/dealbook/sec-and-steven-cohen-reach-settlement-in-insider-trading-case.html https://www.nytimes.com/2016/01/09/business/dealbook/sec-and...

smt88 9y ago

I used to work on Wall St, and nearly every hedge fund was a client of our company. This is absolutely true.

jzwinck 9y ago
There is no single Wall Street vendor who has nearly every hedge fund as a client, unless perhaps you are talking about a major exchange like NYSE. Even that is probably not a valid because of the huge number of firms doing smaller volumes via third parties (and having no direct relationship with the exchange). Or perhaps you worked at Reuters or similar, in which case you would not have much visibility into the funds. So are your two sentences related in any way?
- pliny 9y ago
  He worked at Starbucks and would overhear traders bragging about their crimes in queue.
  - smt88 9y ago
    My understanding is that trading on non-public info isn't a crime unless both parties benefit. The behavior I'm referring to was sharing tips with the expectation of getting tips in return at a later date. As far as I know, it's not possible to prove that's illegal. Also, it's not like actual illegal behavior is uncommon when it's hard to prove, and it's not like a lot of people aren't proud of it. Watch Jim Cramer's interview with Jon Stewart as an example and the reaction to Wolf of Wall Street as another. In business school, a friend asked me to recommend firms where he could do some quiet insider trading by tipping off relatives who would trade on his behalf. He ended up at MF Global. There aren't statistics on this kind of thing, but my experiences have all told me succeeding as a hedge fund requires breaking the same rules as everyone else, not unlike doping in pro sports.
    - poooogles 9y ago
      >My understanding is that trading on non-public info isn't a crime unless both parties benefit. Trading on non public information for a gain is going to land you in hot water with the SEC. These two lines on the SEC site [1] define this. >Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; >Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information 1. https://www.sec.gov/fast-answers/answersinsiderhtm.html https://www.sec.gov/fast-answers/answersinsiderhtm.html

sytelus 9y ago

You cannot perform above average without an information asymmetry. This asymmetry may be either because you found "bug" in financial system or insider information or custom data collection. The test for "good" funds is essentially what information asymmetry they have. If their answer is "good fund managers", "years of experience", "past performance" etc then it's not concrete asymmetry and most likely won't work over longer term.

valuearb 9y ago
Buffett clearly disproves this theory. The reason is it's ignoring the overwhelming impact of bias and mal-incentives. Hundreds of thousands of investors have professional training in valuation techniques Buffett uses. But 99% don't make the same use of that skill as Buffett does, for reasons that include 1) they can't buy in to using valuation as their sole investment criteria. They want to be "smarter", thinking they can see things others can't using psychology or charts or other pseudo sciences. 2) They fall sway to Mr Market ( read the Ben graham parable). 3) They can't sell value to clients and only want a strategy clients will pay for. 4) Buffett spends a great deal of time trying to make decisions free of bias. A CFA program teaches you nothing about this, but it's critical to good valuation work. For example, WEB does not want to know the stock price of a company he's analyzing until he's made his valuation estimate. He doesn't want to be biased into giving a too high valuation to a company he loves just to ensure he can buy it. Lastly, there is a meta level to value investing. A great valuation at a current price isn't enough if the company lacks a competitive moat, or management can't be trusted to treat shareholders well. First level cigar butt value investors never learn this.
- lootsauce 9y ago
  Or perhaps Buffet has an information asymmetry. Don't you think when he is interested in buying a company that may not even be in the public market that the meetings, tours of facilities and financial due diligence represents a significant information asymmetry. This information is probably available to any who seek it but not practically to most.
  - 9y ago