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