If you’re like me, when you think of hedge funds you think of small investment houses managing billions of dollars and using extremely complex strategies involving derivatives and high frequency trading. I picture dark rooms full of PhDs hunched over monitors, pouring over data in search of the next tiny tweak that will increase their profits. Kind of a financial NORAD.
Regardless of whether this scenario is true, there’s definitely one thing that seems to be true about a lot of hedge funds: they’re hungry for data. Today’s financial markets operate at such speed and volume that having slightly better data than the next guy can be worth billions. Hedge funds and other trading shops have been known to pay big money for esoteric data from a variety of sources, which gets fed into those PhD-operated analysis systems and hopefully spit out cash on the other side.
But what about companies that aren’t in the finance industry, but have access to a tremendous amount of data? Here are four types of companies that could possibly leverage their data for higher returns:
Credit card processing – VISA, Mastercard, American Express – Think about the billions of transactions shuttled through VISA’s network every year. That much data about who is spending and where they’re spending has to be incredibly valuable. Could it be leveraged to find unrealized value in the market?
Retail – Amazon, Walmart, Costco – A handful of retailers collectively do more than a trillion dollars a year in sales. Why not use all the data generated by those sales to find trends and companies who are doing better or worse than the market thinks?
Social networks – Facebook, Twitter, Foursquare – Think about how much data Facebook has about what people “Like”, or how much data Twitter and Foursquare are collecting about what businesses people visit and tell their friends about.
Search and Advertising – Google, Microsoft, Yahoo – These are the big ones, of course. Google and Microsoft are both sitting on tens of billions in cash, which probably isn’t earning the best return. Not only do these search companies collect and manage more data than anyone outside of the Federal government, they have the brainpower and data analysis savvy to understand how to leverage that data. Google could probably make billions just through the data produced by Adsense and Adwords alone.
Now, keep in mind that I’m not an attorney, so I have no idea whether this is legal, let alone feasible. I wouldn’t think this constitutes insider trading any more than it would if a car dealer noticed that he was selling a lot more Pilots than Pathfinders and decided to buy Honda stock. But securities laws are weird, so if Bill Gates or Sergey Brin happen to read this, I suggest consulting an attorney. If you need a recommendation, I know a guy.