Data and Hedge Funds

Hedge funds have always relied on information to gain an edge in investing, but they are increasingly looking for new sources of data to stay one step ahead of the competition.  A Boston-based startup called CargoMetrics is taking advantage of this trend by collecting data on commodity movements via ships and in turn, selling that data to hedge funds.  The company raised $2.14 million in funding earlier this year.

 

Value Creation

If you’re in this business of selling data, you can’t just sell data that’s easily available.  Value is created around one or more of these four categories (1)

  1. Scarcity:  How easily available is this data?  Can anyone visit a website and download it?  Obviously, the more difficult it is to find, the more valuable the data is.  Because CargoMetrics is in stealth mode, it’s difficult to know all of the places the company sources its data, but one can assume it requires more than a simple google search.
  2. Granularity: When selling data, the more granular, the better.  For instance, detail-level data is always better than aggregate-level.  Detail-level might include who your users are, time of transactions, location, etc.
  3. Time: There are two aspects of time – the first is how far back in history the data goes, the second is how quickly it takes to receive it.
  4. Structure:  If you can’t parse the data for useful insights, it isn’t valuable.  This is the challenge that many companies face when looking at what to do with their unstructured data.  If you’re able to clean the data and present it in a manner that allow

 

Value Capture

Collecting and structuring data is only part of the game.  Finding someone who’s willing to pay you for it is the other part.  Based on the little we know about CargoMetrics, they appear to be selling their data to hedgefunds.  Typically when a company has data to sell, they can take two approaches.  They can sell their data directly or go through a data broker.  Companies like Acxiom purchase a wide range of data on individuals, package it up, and sell it advertisers, retailers, and financial institutions.

 

 

Sources

  1. http://www.hedgeweek.com/2014/11/03/212370/finding-and-using-unique-datasets-hedge-funds

http://www.boston.com/business/technology/innoeco/2012/02/without_making_waves_data_star.html

http://www.bizjournals.com/boston/blog/startups/2015/01/stealthy-tech-startup-cargometrics-technologies.html

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Student comments on Data and Hedge Funds

  1. Cargo metrics seems to be selling data that isn’t personal, but specific to shipping and commodity movement. In watching the video, Data Brokers, though, it stands to think that data brokers are likely to face more regulation in the future regarding privacy and personal protection. As that happens though, I would think that most individuals would be willing to provide a fair amount of information to data brokers, if they could understand the value the individual will capture by providing it.

  2. Interesting post! I think what CargoMetrics is doing is extremely valuable to hedge funds, who are always looking for a competitive edge. At first, I was worried that if CargoMetrics increases the number of hedge funds on its platform, then that data becomes less valuable in terms of driving a competitive advantage for a hedge fund. As I thought about it more though, I realized that if your competitors have access to CargoMetric’s data, you will likely still pay for it since you’ll be losing out on information that all your competitors have and put yourself at a disadvantage. I’d be interested in seeing how CargoMetric’s business model evolves over the coming years. I think they can make an interesting play – where they increase the number of users while maintaining pricing power given the value of their data.

  3. Really interesting post! One thing that came to mind is the mosaic theory we learned about in FRC. In essence, it is fine to collect a combination of public and non-public information in small pieces to inform your decision about the bigger picture.

    What is interesting in this case is that the hedge funds purchasing this data are able to obtain an advantage by directly looking at the big picture, without doing the research effort to collect it. As pointed out in the previous reply, if all hedge funds purchase the data then they will likely continue paying for it to avoid losing their competitive advantage. But in reality, these hedge funds will be making money at the expense of the average uninformed investor. I wonder what type of opposition they may face from the day-to-day retail investor. At the same time, money managers have always paid for data (e.g. Bloomberg terminal, industry reports), so perhaps this could be viewed as an extension of this practice.

  4. This is very interesting! but I wonder how the business scales from here? Is this the classic example of a very niche business that tops out at <$2M in revenue? Also what are the barriers to entry in this business? What is stopping bloomberg from trying to replicate what the company is doing? Should they just try and exit to Bloomberg or Thompson Reuters while they are ahead?

    Also, I am not sure how much of a trend in the fundamentals of a given commodity can be captured through analyzing Cargo ships – is this tool only useful for very specific comodities? Or does the company have to partner with a lot of other data sources to paint the full picture of any the trends in any given commodity? If they are reliant on bloomberg and others, what does that mean for the company's value capture potential?

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