How Hedge Funds Utilize Data Trends

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Click to learn more about author Tom Wilson.

In the hedge fund industry, where investors need to act according to the current circumstances in order to benefit from them, it’s more important than ever for hedge fund managers to know and ride the latest data trends. Further, the investing trends that show significant growth and promise mostly coincide with data-driven investing trends. Here, we will look closer at them.

The Big Trend of the 21st Century

Sometimes trends come and go before you even notice that they were there. But other trends might prove to be something more, something that eventually changes everything in a specific field.

The latter is the case with the greatest and thus far most important business trend of the 21st century – big data. The increased usage, volume, and types of data in business and finance have changed the game completely. And there are no signs of it slowing down. Quite the opposite, it seems that big data keeps gaining momentum.

And this has surely been felt in the hedge fund industry. Investing has been steadily becoming more and more based on data analysis in the recent decades. Data-based investing models have many advantages, such as removing bias and increasing long-term security. Therefore, hedge funds will continue to utilize big data analytics not only because data is entangled with our way of life today, but also because it simply pays off.

Within the context of this general trend in finance, many related data trends have risen. This diversifies the ways in which hedge funds employ data today. 

Data Trends in the Hedge Fund Industry

As mentioned, big data has changed a lot of things in business and investing. And since data is related to a lot of things today, there are many very different ways in which it affects the way things are done.

Here are the most important data trends that hedge funds are utilizing nowadays.

1. Alternative data: The central realization about data that has transformed finance completely is that data comes from multiple sources. If once there was only a limited set of traditional industry sources, today hedge funds are utilizing many different kinds of data. Alternative data comes from sources such as social media, sensors, smart devices, and business transactions. These alternative data types help to paint a fuller picture of the market circumstances, as well as get the key information sooner than it appears on the industry reports. Thus, alternative data continues to attract hedge fund managers.

2. Machine learning: Artificial intelligence is now capable of learning without the constant overwatch of humans, and it comes very much in handy for investment analysts. Specifically, machine learning refers to the ability of algorithms to learn how to solve new problems by continuous data analysis. This allows the algorithms to adapt and generate answers that they have not initially been programmed to generate. For hedge fund professionals, this means a whole new level of fast and adaptive decision-making.

3. Model building: In a world filled with numbers, where almost everything is quantifiable for better analysis, investors have to rely more on mathematical models for their decisions. These models are meant to take all kinds of data into account and make the best predictions based on all available information. Additionally, well-built computer models are capable of producing the desired answers efficiently and quickly updating these answers when parameters change. Thus, hedge fund analysts are constantly working on building the best data models for investment decisions.

4. Data-driven management: The final data trend that is on the rise is data-driven management. This includes such decision-making as hiring or the way hedge fund employees spend their working hours in order to maximize efficiency. While data-driven recruitment has been going strong for some time now, showing great results in finding the right fits for hedge funds, using algorithms for other managerial decisions is a relatively recent innovation. This means that there are still a lot of trial periods to go through, but it seems that the trend is moving in the direction of giving more and more decision power to artificial intelligence.

Data’s Future

Data trends may shift and change as years go by, but we can be pretty sure that data itself is not going anywhere. The world is producing more and more of it, and it is clear now that data is the key to high-quality decision-making in the business of this century. Thus, as hedge funds go through many trends, a lot of those trends will be related to data for years to come.

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