Hedge Funds’ Information Advantage: Reading the News?

In the never-ending hunt for alpha, hedge funds are seeking an information advantage from what is perhaps an obvious source: the news.

Of all finance professionals, hedge fund managers are among the fastest and most active consumers of news—and the most likely to trade based on what they learn, found Harvard University PhD candidate Anastassia Fedyk.

“They are disproportionately more likely to be the first to read any given piece of financial news,” she wrote, adding that consumption of news by hedge fund managers was “strongly related to trading volumes and security return dynamics.”

For the study, Fedyk analyzed click data collected between March 22, 2014 and March 2, 2015 for 3.5 million online articles tied to US stocks. The dataset included hundreds of thousands of readers employed by firms in 21 financial, media, and government sectors.

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Hedge fund managers accounted for just 8% of all readers—but were the first to consume more than 27% of all articles. These professionals were also among the most voracious readers, consuming an average of 531 news stories each over the year. The average investment manager, meanwhile, read just 261 articles.

Fedyk further found that hedge fund employees were better at identifying breaking news: Roughly 18% of hedge fund clicks were on new articles, compared to an average of 16% for other reader groups.

“They are less likely to click on stale news stories than readers from most other industries,” she said.

For every standard deviation increase in after-hours news consumption, next day trading volume for hedge funds increased by 2.1% to 2.3%. Absolute abnormal returns for that trading period also increased by 21 to 23 basis points—although Fedyk did not find conclusive evidence on whether or not these short-term returns actually translated to long-term performance.

“Hedge fund readers… are not only more sophisticated than other investors in terms of their news consumption,” she concluded, “but also more influential in transmitting the information into market outcomes.”

Read the full report, “News Consumption: From Information to Returns.”

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Australia’s construction and building industry pension fund will build out its in-house investment capabilities considerably, the fund announced Monday.

Cbus, which currently employs an investment staff of 34, plans to boost that number to 59 over the fiscal year as part of a new investment strategy focused on managing the fund’s growing pool of assets. The superannuation fund, which currently manages A$34 billion (US$26 billion), said it expects to grow to more than A$50 billion in the next three to five years.

“The fund is on its next exciting journey of growth and change, requiring new ways of investing,” said Trish Donohue, executive manager of investment management at Cbus. “Our new model will provide some great opportunities and challenges for the team over the next few years.”

The new strategy is built on three themes: taking advantage of a long-term investment horizon, taking a total portfolio approach, and targeting investments that will “have a positive impact on the real economy, particularly through the built environment.”

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“Our new model is a clear path to ensure we continue to deliver for our members into the future in a way that can also make a positive contribution to the economy and society,” said Kristian Fok, Cbus’ executive manager of investment strategy.

Fok said the fund would retain its current external managers, but leverage a larger in-house team to make direct investments in both new and existing infrastructure assets.

“Internal Australian and international equities management also offers the opportunity to build capabilities to manage specific strategies that complement our existing managers,” he added.

To ensure the new model is properly implemented and supported, Cbus said it will also be adding to existing staff in the areas of compliance, operations, communications, risk management, and performance reporting.