Hedge Fund Technology
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Blogging for Alpha
June 26, 2006
The more crowded and competitive the hedge fund industry gets, the more difficult it is for fund managers to set themselves apart from competitors. The above-average returns that might come from developing unique, technology-based trading strategies are harder to come by. Curiously, one answer to this problem may come from a technology that in a few short years has become decidedly mainstream: Web logs, better known as blogging.
Foster City, Calif.-based firstRain provides blog-watching services to about 75 clients, including 12 hedge funds, that are looking for investment ideas or perspectives that wouldn't be likely to appear in newspapers or other media, according to Todd Enders, the company's marketing director.
A posting in France, for example, brought attention to plans by Paris-based software developer Business Objects to roll out an Internet-based on-demand service to complement its licensed software model. At the time, customers weren't allowed to talk to analysts or the media.
"So what you get is technical people on a technical message board, saying, We're using it in our firm and it's relatively painless,'" says Enders. The blog discussion alleviated concerns one hedge fund manager had that technical problems might delay the product's release. He concluded that Business Objects would soon offer the service in the U.S. and bought the stock several weeks before news about the service drove up the share price.
Another worthwhile and off-beat blogging source was a lively exchange in the San Francisco Bay area among people interested in knitting and beading - not about arts and crafts, but about the plans of Hewlett-Packard Co. to acquire Compaq Computer Corp., both of which employed people on the blog. The postings gave hedge fund managers close insights into negative feelings employees had about HP's management and the 2002 merger -- views that ran counter to the generally bullish news and analyst reports, Enders says.
"The people who are mid-level managers have hobbies and children and lives," explains Enders. "If you're following high-tech companies, you'd be amazed at how much traffic there is going on in message boards in the Bay area."
Staff at firstRain, which has about 100 employees in California, New York, Boston and India, spend hours searching the Web for non-traditional information sources of interest to fund managers.
FirstRain seeks out specific sites, such as regional discussion boards in areas where the target company is headquartered, or blogs run by professional organizations, says Enders. One of his favorites is a blog for Indonesian geophysicists. Enders says that firstRain actively scans lists of sites for its customers, and its technology ensures that the stories retrieved from these sites are relevant to customers' needs.
One of the company's clients is Williams Jones & Associates, a New York-based registered investment adviser with nearly $3 billion of assets under management. "FirstRain gives our portfolio managers a competitive edge by discovering sector-specific intelligence, based on their investment theses, from the sources most relevant to the portfolios they manage," says David Rosenfeld, Williams Jones' director of research.
FirstRain delivers the intelligence in a way that is useful to portfolio managers, Rosenfeld adds. Swamping managers with information would be all too easy. Enders says that by focusing specifically on the manager's market insights and theories about the most informative indicators, the flow of information can be narrowed down to just one or two items a day. For example, "If you're following gambling, you might want to know everything that talks about new tunnels and bridges to [Asian gaming destination] Macau."
In January, firstRain released Portfolio Manager Edition, a customized intelligence repository that gives managers an automated way to get to the qualitative fundamentals about their investments, says firstRain CEO Penny Herscher. Now, firstRain's clients are asking the firm to concentrate on specific sectors. FirstRain will initially focus on pharmaceuticals, technology and energy and, within a year, Herscher says that she expects all major industry sectors to be covered.