Oh, Those Sneaky Hedge Funds

Anthony Malakian, US Editor, WatersTechnology

This week two articles in the Financial Times caught Anthony's eye. Are hedge funds really an extension of some covert government agency, or are they desperately seeking alpha?

With all the revelations around the National Security Agency's (NSA) surveillance and data mining programs, frankly I'm ready to believe most anything, and believe it with a shrug. But two headlines this week on the Financial Times' website did catch my eye: "Hedge funds turn to spy technology" and "Hedge funds turn to psychology software to revolutionise trading".

For the former article, apparently hedge funds are tapping satellite technology vendors such as RS Metrics and Geospatial Insight to monitor the parking lots of major retailers to make predictions ahead of earnings announcements. Additionally, they use this information, according to the FT, to assess "the quality of ore in a pile, or the health of crops," using satellite infrared technology.

It's no secret that hedge funds have employed human sleuths to gain an advantage ahead of earnings season, but a move to outer space is one giant step, indeed.

Now the only people interviewed in this article were the two technology companies mentioned above, and they work in partnership. So this might not be so much of a trend, as a single hedge fund or two looking into the technology. But, according to the head of sales at RS Metrics, "the company has picked up 25 hedge fund and money manager clients in the last two years and that business growth has been ‘exponential' this year," the article states.

I've never personally heard of this, but I'd also imagine that it's something that hedge fund managers aren't likely to go around talking about. Is this the next wave of technology spend on the buy side as advantages gained from low-latency trading wane? I'm skeptical, to say the least.

The other article actually has more bearing to it, in my opinion, because it quoted Simon Savage of Man Group's GLG Partners as saying that the use of psychology software, developed by a former Morgan Grenfell fund manager, is "a groundbreaking development, which we hope will give us that extra edge in an industry that is becoming more and more competitive," Savage tells the Financial Times.

The program is designed to create an optimal environmentor state of beingfor traders which provides "a checklist for top performers," says Clare Flynn Levy, the former trader who developed the product.

The fact that Man Group is willing to publicly endorse the product adds some level of gravitas. But, again, I'm skeptical. Psychology tests can be almost like Tarot card readings and can be gamed by the participant. Flynn Levy is quoted as saying, "As a fund manager, I used to work over the summer until I realized I was better off taking a break and coming back refreshed and motivated."

Yeah, me too. I'm not a fund manager, but I think having the summer off would be very good for my output.

Just because I'm skeptical doesn't mean that these new technologies aren't valuable, though. I'm currently working on a feature looking at how prop trading shops increasingly care less about trading latency as a distribution, and are instead investing more in measurement and monitoring technologies to better ensure an efficient and consistent trading environment.

Being fastest isn't generating the same returns as it once did, so they need to find new ways of gaining alpha. So is it so crazy that they would experiment with satellite technology, or psychology software?

Who knows, maybe in a year or two one of these firms mentioned might win one of our Buy-Side Technology awards...which leads me seamlessly into this: We are extending our deadline entry by a week for this year's BST Awards nominations.

If you have any questions about how to enter, shoot me an email ([email protected]) or give me a call (646-490-3973).

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