Hedge Funds’ Information Advantage: Reading the News?

Hedge fund managers’ news consumption can translate to trading volumes and return dynamics, according to a Harvard University study.

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 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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