Hedge Funds and Big Data

It's no secret that many hedge funds rely on analysis of big data for making investment decisions. For years it has been speculated that quants and scientists tasked with pouring over huge quantities of data would develop sophisticated and profitable algorithms to trade off this information. However, a recent article by Bloomberg suggests they may no be having the success many envisioned.

Big data is a catchall phrase used to describe a broad variety of information derived from social media sites like Facebook and Twitter, Google searches, online customer purchase information, and even satellite photos. However, it's unclear many hedge funds have been able to reliably use this information to their advantage.

In one example, funds used to dealing with conventional financial filings tried to understand the impact of a foodborne illness on Chipotle's sales. Rather than waiting for quarterly sales guidance, they chose to study location apps that indicated foot traffic was declining. The problem is this overlooked an important fact; in the winter months many customers chose to have meals delivered instead of venturing in to Chipotle.

While hedge funds also had difficulty predicting the 2016 election or Brexit, they do sometimes connect. For example, start up hedge fund Predata claims it has correctly predicted attacks on North African oil fields and various political moves in Europe.

Still, as many hedge funds rush to higher scientists specializing in big data analysis, it's less than clear many will be able to filter the noise and develop profitable trading strategies.