• Billionaire short seller Jim Chanos says the current market environment is similar to the dotcom bubble of the early 2000s, but not as dangerous as 2008. 
• "I'm stunned at the number of huge loss-making enterprises," Chanos said at an event at the Indian Harbor Yacht Club in Greenwich, Conn., Thursday night.
• The founder of Kynikos Associates told the roughly 60 attendees that he believes some of the biggest unicorns that have gone public — like Uber and Lyft — did so only because they ran out of funding in the private markets.
• For more stories like this, visit Business Insider's homepage.

The talk at the Indian Harbor Yacht Club Thursday night was about cars instead of boats for a change.

Legendary short seller Jim Chanos, the billionaire founder of Kynikos Associates, spoke at the Connecticut Hedge Fund Association's second quarter meeting in a fireside chat with Fox Business reporter Charlie Gasparino. 

Chanos, a well-know Tesla short, spent a good part of his hour-long conversation on the state of the market, comparing it to the dotcom bubble in the early 2000s. He told the roughly 60 attendees that ride-sharing companies Uber and Lyft only went public because their funding had run out in the private market. 

"It's not that they wanted to go public, but have to," Chanos said. "They were beginning to exhaust their funding from the VC and sovereign wealth funds." 

Read more: Josh Friedman's $10.5 billion hedge fund has shifted to having almost 20% of the fund in cash, as it backs away from a shaky stock market

The two companies — which have stumbled in their debuts as public companies — could not keep relying on private money because they were leaving the early-stage growth cycles that's favored by venture capital, Chanos said. 

Representatives for Uber and Lyft did not immediately return requests for comment. 

Even compared to the tech bubble, when companies like Ask Jeeves and Pet.Com rapidly grew in value, Chanos is "stunned at the number of huge loss-making enterprises" operating now. 

"It's real money" they're losing every quarter, he said in astonishment. 

Still, he thinks any similarities drawn to the 2008 financial crisis now are overblown, telling Gasparino that the economy is "not even close" to a "Lehman moment." 

Read more: The CEO of SoftBank Investment Advisers, who runs the world's biggest venture fund, offers an inside look at how he picks which companies to lavish with billions of capital

However, the easy money that has been available to startups appears to be drying up, which indicates investors might be concerned about a potential rate hike from the Federal Reserve— or even a prolonged economic slump. He specifically pointed to SoftBank, which has begun selling off some of the stakes in now-public companies, like Alibaba.

"When the crazy drunken buyer of last resort becomes a seller, or has their drink taken away, then maybe there's a hangover coming," he said.

SEE ALSO: Billionaire investor Stanley Druckenmiller says there should be only '200 or 300' hedge funds, not thousands — and he expects a culling of the herd

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• For nearly a quarter century, the Sohn Conference has brought together the best and the brightest in the investment world to pitch their ideas in front of thousands of their peers, spring-boarding many into industry-wide name recognition.
• Six years ago, the conference began its "Next Wave" series, which features rising stars in the hedge-fund game.
• We profiled the five-person class — the most diverse yet.

If you want to make a name for yourself in the hedge-fund game, you could start with presenting an investment idea at the Sohn Conference.

The high-profile event has been attended by thousands of investors every year for the past 24 years. This year's headlining speakers include DoubleLine CEO Jeffrey Gundlach, D1 Capital Partners founder Daniel Sundheim, and Glenview Capital founder Larry Robbins.

But for the past six years, the conference has put rising stars on the stage as a part of its "Next Wave" series to pitch their best investment ideas. Past participants include Tourbillon founder Jason Karp and former Blue Mountain Capital portfolio manager David Zorub, who is starting his own fund.

See more: Inside the hellacious hedge-fund money-raising environment, where 'even the big funds have to get creative'

For the first time, a majority of the "Next Wave" presenters will not be white men, in an industry where less fewer than 5% of hedge funds are owned by women and fewer than 10% are owned by minorities, according to a report from Bella Research Group and the John S. and James L. Knight Foundation.

The five speakers are Angela Aldrich, the founder of Bayberry Capital; Todd Westhus, the founder of Olympus Peak Capital; Parvinder Thiara, the founder of Athanor Capital; Lauren Taylor Wolfe, the cofounder of Impactive Capital; and Matthew Smith, the founder of Deep Basin Capital.

Learn more about them before you listen to their pitches.

Angela Aldrich, the founder of Bayberry Capital, is excited about short bets.

Angela Aldrich always wanted to work for a hedge fund. The Duke grad worked in Goldman Sachs' investment-banking division after college, with a focus on making it to a hedge fund, and got her first taste when her boss at Goldman, Byron Trott, started BDT Capital in 2009.

After working two years for Trott, Aldrich enrolled in Stanford Business School but kept her foot in the industry by interning for John Griffin's Blue Ridge Capital.

She ended up working at Blue Ridge for four years after finishing at Stanford, and it was where she "learned how to short," she said in an interview with Business Insider.

See more: Investors are jumping back into hedge funds as they prepare for a stock-market drop

That focus on the short side of the portfolio — Bayberry invests long and short in small- and mid-cap companies — is what Aldrich believes sets her new fund apart. Bayberry, which has more than $150 million in assets and counts Griffin as a backer, launched in April and has four employees at the moment.

She hopes to keep the fund small so that she can continue to "play in the most exciting space" of small- and mid-cap companies and plans to present a short at the conference that is "relatively controversial, definitely on the spicier side of the spectrum."

The headwinds facing the industry, and long-short equity funds in particular, have not dampened Aldrich's dream of working at a hedge fund.

"It's a particularly exciting time to be in long-short equity, especially after such a long bull run," she said.

Todd Westhus, the founder of Olympus Peak Capital, has been involved in some of the biggest global financial moments of the past decade.

Todd Westhus does not think all his ideas are going to work out. The former Perry Capital and Avenue Capital portfolio manager is more focused on placing his bets on ideas that will either win big if his hypothesis is right or have a soft landing if he's wrong.

"I don't care if I'm right or wrong: I care about how much I can make when I'm right and how much I'll lose if I'm wrong," Westhus told Business Insider. The Duke grad forced his way into the hedge-fund world by walking into Avenue Capital's offices in 2002 and asking for an interview. Until that point, Westhus had been in investment-banking programs at JPMorgan and Morgan Stanley.

"How does someone without any experience get a job at a fund?" he said.

After working at Avenue for four years, he joined Perry Capital, where he has been involved in some of the biggest global financial moments of the past decade: Westhus had a multibillion short on the subprime housing market, placed macro bets when the eurozone was in crisis thanks to Greece's economy crumbling, and invested in Argentina while the country was defaulting on its debt.

See more: Investors are hot on hedge funds again, but old-school stock pickers are getting left in the cold

"At any other fund I would have been siloed," he said, adding he was thankful for Perry letting him "roam."

Those experiences, Westhus said, are the guiding principles of his new firm, Olympus Peak Capital, which has $600 million, but expects to be closer to $750 million by the end of the summer thanks to a couple of large institutional investors that have signed on. "Our strategy is just to be flexible," he said.

Part of that flexibility requires the fund to not get too big, and Westhus said he does not want the fund to get bigger than $1 billion. His former billionaire bosses, Marc Lasry of Avenue Capital and Richard Perry of Perry Capital, are both backers of his new firm.

He didn't reveal much about what his presentation at Sohn will be on beyond saying "it will be controversial."

Parvinder Thiara, the founder of Athanor Capital, is building from the ground up.

With about $1 billion in assets and a staff of 20, Parvinder Thiara's Athanor Capital looks to be on steady ground less than two years after beginning trading. What those numbers don't show, Thiara said in an interview with Business Insider, is how tricky it is to get there.

"The hardest thing that people underestimate is attracting top-tier talent, because you're starting out and competing with top funds for these people," he said.

Thiara was at D.E. Shaw before starting Athanor and has several D.E. Shaw alums on his staff, including COO and chief compliance officer Hilario Ramos. The macro relative value fund's main investors so far have been endowments and foundations, sovereign wealth funds and pension funds, according to Gabriela Teodorescu Bockhaus, Athanor's head of marketing.

Despite large investors already jumping into the fund, Thiara said "we don't have grand visions to become a huge hedge fund with dozens of different strategies."

See more: Silicon Valley has made top data-science talent too expensive for many hedge funds, so they're getting creative to compete

"Our main aim is to deliver alpha, and to have fun as a team while we do so."

The having-fun part was admittedly tough for Thiara as he worked to get his fund off the ground. "It's stressful, it's hard, but when it comes together, it's worth it," he said.

Now, he says, he sees the "a unique satisfaction that comes from building something from the ground up."

His Sohn presentation will be a macro pitch, not a stock, which he thinks will make it less controversial than some of the other speeches of the day. Still, he expects it to be "certainly different" than anything else presented.

Lauren Nicole Wolfe, the cofounder of Impactive Capital, is an ESG activist.

After a decade of activism work at Blue Harbour, Lauren Taylor Wolfe's new activist fund is focused on more than just improving margins.

Impactive Capital, cofounded by Wolfe and her fellow Blue Harbour alum Christian Asmar, is looking for companies that have room to improve in both the traditional business sense and in environmental, social, and governance (ESG) ratings.

"A lot of investors started to think about ESG as a way to calculate risk, and we find that valuable and interesting, but we wanted to take that a step further," Wolfe said in an interview with Business Insider. The Cornell and Wharton alum just added two more people to her team, to give the firm eight staffers, including analysts from fellow activist funds Trion Management and ValueAct Capital.

See more: Hedge funds are spending billions to get an edge through access to satellite images and credit-card transactions. Now they fear a crackdown's coming.

The fund received a notable early investment from the California State Teachers' Retirement System of $250 million with a private-equity-like commitment of six years. Wolfe believes the strategy Impactive is using requires a longer time horizon as they push companies to diversify their boards, change their emission polices, and promote more underrepresented groups.

"This is a conversation that is happening in every boardroom," Wolfe said, referring to ESG. She believes Impactive will be able to grow its boardroom influence by offering long-term ESG solutions and proving that her fund is not planning on selling their investment the moment it goes up.

"We wanted to take a different approach to activism — we have a longer time horizon," she said.

Her Sohn presentation is going to be on a company the firm is invested in where Impactive believes there is a chance for operational and ESG changes that will increase the firm's worth.

Matthew Smith, founder of Deep Basin Capital, used to run billions for Ken Griffin.

After running a portfolio worth a reported $3.6 billion for Ken Griffin's Surveyor unit, Matthew Smith has settled into running his own fund, Deep Basin Capital, over the past year and a half.

Smith counts O'Shaughnessy Asset Management as an investor in the more than $900 million fund, which does a mix of fundamental and quantitative research on energy investments. The fund, according to a spokesperson for Smith, is named after a term coined by geologist John Masters in the late 1970s to describe the discovery of a rare, enormous accumulation of trapped natural gas in Western Canada.

Before working at Citadel for about six years, Smith worked for Highfields Capital, JCK Partners, and Copper Arch Capital, according to his LinkedIn. He went to the University of Iowa for his bachelor's and received his master's in finance from the University of Wisconsin.

The Stamford, Connecticut-based manager has 13 people on its team.

See more: Inside the Chicago hedge-fund turf war between billionaire Ken Griffin and Dmitry Balyasny

• Billionaire short seller Jim Chanos says the current market environment is similar to the dotcom bubble of the early 2000s, but not as dangerous as 2008. 
• "I'm stunned at the number of huge loss-making enterprises," Chanos said at an event at the Indian Harbor Yacht Club in Greenwich, Conn., Thursday night.
• The founder of Kynikos Associates told the roughly 60 attendees that he believes some of the biggest unicorns that have gone public — like Uber and Lyft — did so only because they ran out of funding in the private markets.
• For more stories like this, visit Business Insider's homepage.

The talk at the Indian Harbor Yacht Club Thursday night was about cars instead of boats for a change.

Legendary short seller Jim Chanos, the billionaire founder of Kynikos Associates, spoke at the Connecticut Hedge Fund Association's second quarter meeting in a fireside chat with Fox Business reporter Charlie Gasparino. 

Chanos, a well-know Tesla short, spent a good part of his hour-long conversation on the state of the market, comparing it to the dotcom bubble in the early 2000s. He told the roughly 60 attendees that ride-sharing companies Uber and Lyft only went public because their funding had run out in the private market. 

"It's not that they wanted to go public, but have to," Chanos said. "They were beginning to exhaust their funding from the VC and sovereign wealth funds." 

Read more: Josh Friedman's $10.5 billion hedge fund has shifted to having almost 20% of the fund in cash, as it backs away from a shaky stock market

The two companies — which have stumbled in their debuts as public companies — could not keep relying on private money because they were leaving the early-stage growth cycles that's favored by venture capital, Chanos said. 

Representatives for Uber and Lyft did not immediately return requests for comment. 

Even compared to the tech bubble, when companies like Ask Jeeves and Pet.Com rapidly grew in value, Chanos is "stunned at the number of huge loss-making enterprises" operating now. 

"It's real money" they're losing every quarter, he said in astonishment. 

Still, he thinks any similarities drawn to the 2008 financial crisis now are overblown, telling Gasparino that the economy is "not even close" to a "Lehman moment." 

Read more: The CEO of SoftBank Investment Advisers, who runs the world's biggest venture fund, offers an inside look at how he picks which companies to lavish with billions of capital

However, the easy money that has been available to startups appears to be drying up, which indicates investors might be concerned about a potential rate hike from the Federal Reserve— or even a prolonged economic slump. He specifically pointed to SoftBank, which has begun selling off some of the stakes in now-public companies, like Alibaba.

"When the crazy drunken buyer of last resort becomes a seller, or has their drink taken away, then maybe there's a hangover coming," he said.

SEE ALSO: Billionaire investor Stanley Druckenmiller says there should be only '200 or 300' hedge funds, not thousands — and he expects a culling of the herd

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• Essentia Analytics, founded by a former hedge fund manager turned software company president, wants to help traders identify decisions that make money and avoid those that don't. 
• By analyzing under what circumstances portfolio managers have underperformed  – through a combination of machine learning and human analysis – the startup seeks to nudge them toward different choices in the future. 
• Essentia often appeals at first to endurance athletes and academically-minded traders interested in overcoming their own biases. But it can be hard to convince some veteran traders to look in the mirror.
• Read more about the future of data on Wall Street here. 

Clare Flynn Levy knew she was doing something right picking technology stocks in the late 90s, but she didn't know exactly why. 

Just out of Barnard College at the time, the then-portfolio manager at Deutsche Asset Management was "the toast of my team," she recounted in a recent interview in New York. Her portfolio was soaring in tandem with the tech sector, but she couldn't find much information to explain why she did so well. Was she holding stocks for the right amount of time, adding appropriately, or exiting particularly well? Could she have made any of those decisions better and outperformed even more? 

"As a fund manager, I was looking for companies that maximized the return on capital deployed," Levy said. "Yet I couldn't convince myself that I was maximizing my return on my own capital – my energy capital. Therefore how could I possibly produce consistent, positive performance?"

See more:A top BlackRock exec says it's struggling to crack the data conundrum, and the process is full of 'headache and heartache'

Even in her subsequent roles, first as a tech-focused hedge fund manager, then as president of a software company for hedge funds, followed by internal and external advisory positions, Levy was frustrated by the lack of detailed performance feedback for stock pickers. In 2013, she founded London- and New York-based Essentia Analytics to create the evaluation system she had wanted. 

Now, Essentia assesses historical trading patterns for fund managers at more than 30 clients globally. The startup uses machine learning to dig into when traders out- or under-perform and connects them with former fund managers for quarterly analysis and coaching. Essentia's software also prods managers to reconsider potentially money-losing decisions in the moment, based on their past trading behavior, and sends them alerts about which companies to focus on to narrow their attention. Levy likened it to athletes reviewing game and practice tape. 

"Some people trade around too much. Some people hold onto losers for too long. Some people get sucked into the momentum. Everyone's a little different, but there are some common biases we've seen documented in academic literature that we can see in investing," she said. 

Essentia's clients include long-only and hedge funds, ranging in size from $1 billion to hundreds of billions. Since the company raised a £2.5 million Series A funding round in January, it's exploring expanding to other asset classes, working with allocators, and improving benchmarks, Levy said. 

Essentia doesn't work for every trader, but as investors flee actively-managed funds, it's more important than ever for investment firms to articulate their competitive edge by showing how they're generating outperformance beyond beating a benchmark. And as the buy side faces ever-growing margin pressures, they need every one of the 94 basis points of foregone alpha that Levy said Essentia identifies, on average, for each manager. For a $500 million portfolio, that's $470,000 that Levy said managers leave on the table because of their decision making. 

FitBit wearers and CFA holders 

The startup's approach fits with increasing interest in examining behavioral bias within finance. Dr. Enrichetta Ravina, a finance professor at Northwestern University's business school, explained behavioral biases as "rules of thumb" that help make decisions quickly. In investing, they can manifest as overconfidence or chasing trends, among other attitudes. 

"Evolutionarily, behavioral biases are efficient – you don't want to calculate a problem every time you make a decision," she said. "Sometimes in finance, those same shortcuts that help you everywhere else in life are going to be your enemy. Everyone has behavioral biases. They're very natural and they actually overall are optimal from a life point of view, but they're problematic in investing." 

Ravina said that she's heard of large managers similarly keeping track of under what conditions traders do well and when they don't. If a portfolio manager makes a decision that's historically led to underperformance, the manager's firm might take an opposite position against the trade – without telling the manager that the firm is betting against him or her.

Internal risk managers also typically analyze much of what Essentia captures, but Levy said traders are more willing to work with an independent group than a company risk manager, who they view as "the police." 

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Some fund managers are particularly keen to analyze their performance and mitigate those behavioral biases, Levy said. Early adopters at any given firm typically include "continuous improvers," often endurance athletes and people who wear monitors like FitBits – they're accustomed to quantifying their training and health, and want to translate that attitude to their jobs. Academically-minded fund managers, typically those who hold the Chartered Financial Analyst designation, are also early adopters. 

Those groups "don't need any selling on the concept of using data to do a better job, and they have no qualms about looking into the mirror and seeing that they're not perfect," Levy said. "As this concept of behavioral alpha is being embraced by the industry more and more, it has to trickle down to people who aren't as excited right off the bat, who are worried this is going to humiliate them in some way, that they're going to get fired."

'A little bit scary in the beginning'

Levy said reluctant managers include veteran traders who have decades of experience and no desire to look at their history, thinking they understand themselves better than a computer or a former trader could. Sometimes, such traders come around when they see colleagues' performance improvement, or when allocators and consultants ask them to prove their investment process. 

"That's a killer question right there," Levy said. "If you're a human active fund manager, you're under a ton of pressure now to prove that you're worth the fees you're charging, when the alternative is a cheap index fund that demonstrates zero skill, but it's also not pricing in any skill." 

For Seth Wunder, who founded $750 million long/short fund Black and White Capital, his six months using Essentia so far have underscored that he does particularly well with position sizing – identifying big ideas and leveraging them well. 

"For myself, it was a little bit scary in the beginning because the reality is you perceive why you're making money, but to potentially be told you're not making money for the same reasons you think you are, or you would have made more had you done X, Y, or Z, is interesting," he told Business Insider. "I could see why people wouldn't care to know or deal with it."

Next, he plans to overlay his firm's internal research with Essentia's data for what he expects will lead to even better trading outcomes. 

Essentia isn't applicable for all strategies, like quantitative investing. Olivia Engel, the State Street Global Advisors active quantitative equity chief investment officer, said she was pulled to the quant side because it's less susceptible to behavioral biases than fundamental stock picking, where she got her start as an analyst. 

See also: Bloomberg is diving in to the booming alternative-data field with a new product that'll help the market become mainstream

"You may think you're good at trading something because all you remember all the ones that went well, but if you objectively measure all of your trading, the story may be different because what you remember is colored by your experience and emotions along the way," she said. Of Essentia, she added, "I think it's a novel and interesting thing they're doing." 

While not all investment strategies are the right fit for her startup, Levy said one good target would have been a hedge fund she advised during the recession. The fund was led by a manager who fully believed in his own competitive advantage but couldn't articulate it to investors.  

"Maybe it wouldn't have made a difference in the context of the financial crisis, but investors pulled their money out quite rapidly," she said. "If we could've provided them with more data that gave them piece of mind about leaving their money with us, it would've made a difference."

• Read more:
• UBS is now operating 1,000 robots, and it's betting they can help create 'super human' employees
• Artificial intelligence is transforming a $22.9 trillion investing strategy – but the cutting-edge technology comes with a new set of problems
• Credit Suisse's CTO says that AI could create huge opportunities on Wall Street and that banks haven't even scratched the surface

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• Hedge funds' margins are under pressure as fees decrease and expensive alternative data becomes table stakes.
• With the industry maturing, some of the biggest managers have expanded their businesses beyond just investment strategies, including spinning off companies that could help their rivals with data processing, back-office work, and trading. 
• Managers like Brevan Howard and Winton Group have spun out companies that sell data services and artificial intelligence to their competitors. Meanwhile, data companies that sell their datasets to alternative managers have launched their own hedge funds. 
• Read more about the future of data on Wall Street here. 

In the cutthroat world of hedge funds, where the egos of billionaires create intense inter-firm rivalries, giving a competitor a leg up is unheard of. 

Yet as margins shrink and outflows continue, some large hedge funds like Winton Group and Brevan Howard are spinning out companies focusing on artificial intelligence and data collection. The underlying reality of these businesses is that they are recruiting their parent companies' competitors to be their clients — a sticky situation for both sides. 

For funds looking to sell plug-and-play technology or data cleaning tools, there's the chance the proprietary tools used to push you into the top tier of the industry will now be available to your peers. And for investors who are thinking about integrating competitors' tech into their systems, paranoia about the divide between the tech company and its hedge fund parent is not unusual. 

"Inevitably, a key potential client base for Hivemind is other investment management companies although we by no means see that as the limit of Hivemind's applicability," said Daniel Mitchell, CEO of Winton Group's Hivemind, in an email to Business Insider. 

See more: A bunch of hedge fund managers featured in 'The Big Short' are among the casualties of Citadel's most recent cuts

Mitchell's company has gotten funding from Barclays and Fidelity International, and uses machine learning and "crowdsourced human intelligence" to make complex datasets understandable.

The company believes it is no different than any other third-party company a manager would use despite the close ties to the London-based hedge fund, Mitchell said.

"Although occasionally potential clients question the closeness of our relationship with Winton we assure them that we don't see our position as being different from that of any other software provider who might sell to multiple firms who compete."

Other examples of spun-off companies D.E. Shaw's Arcesium, a back-office technology firm, and Brevan Howard's Aim2, an artificial intelligence platform that Nomura is using on its trading desk. Point72 founder and billionaire Steve Cohen invested in crowd-sourced quant platform Quantopian, which gives anyone the ability to write their own investment algorithm with the chance that it could be licensed by Quantopian — a potential competitor to Point72's Cubist arm. 

However, there is a substantial difference between renting out operational technology and selling your alpha-generating data.

Yet, as leagues of web-scraping bots and alternative-data companies pump more information into hedge funds than ever before, one consultant foresees a future where hedge funds with a sizable data collection organization begin to profit off the sale of their library, and not through a spun-off company. 

Opimas said in a report it expects funds to resell "their information that they have gathered through web-scraping" though there doesn't appear to be any fund that is doing this or has expressed interest in it — yet.

Data-sharing the next step?

Information has always been the name of the game for hedge funds that constantly are under pressure to squeeze every possible basis point out of every trade. One of the key reasons hedge funds are planning to spend billions scraping websites and buying datasets based on satellite images is because this niche data is something their competitors don't have. It begs the question why any hedge fund would be willing to sell to their competitors.

"Data, and how managers manipulate it with their own processes, is the only secret sauce left," said Shannon Murphy, head of strategic content in Jefferies prime services unit.

The biggest advantage of one of the most successful hedge funds in history, Renaissance Technologies, is its "massive data library" that it doesn't share, according to Robert Frey, the CIO of fund-of-funds FQS and a former managing director at Renaissance Technologies.

"Data is the lifeblood of a quant system," said Frey, who doesn't see the benefit to the fund in selling data. 

See more: Hedge funds are spending billions to get an edge through access to satellite images and credit-card transactions. Now they fear a crackdown's coming.

Yet others see it as a way to make money off a common resource while keeping your recipe secret — like charging someone for flour and eggs but not telling them how to make a cake.

"No one's ever going to crack the code of how you're using it internally," said Greg Skibiski, CEO of Thasos, an alternative data company that sells datasets based on location data of cell phones to hedge funds.

"This is a tool to get information, you extract a lot of info back from the market — who is working on what and where are they looking."

With the top funds all using the same alternative data providers, like Nasdaq's Quandl, the data becomes less exclusive and more like table-stakes — giving funds a chance to repackage the data and sell it to smaller competitors — recouping some of the costs required to get it in the first place. 

Goldman Sachs has embarked on a version of this vision with its Marquee trading platform. The bank is exploring a subscription-like service where users could get risk analytics, data, research, and more from the platform, without having to contact anyone at Goldman for it.  

TwoSigma has joined Goldman and Citi in investing a company called Crux Informatics, which cleans and analyzes datasets for financial services firms, which would presumably include competitors of the hedge fund and the two banks. 

The goal is for Crux to "democratize, if you will, and reduce the cost of certain kinds of data," says Alfred Spector, the chief technology officer for TwoSigma.

"We don't view it as a competitive advantage, and we'd rather just do it effectively and facilitate it across the industry."

Trusting your competition

The concern about working with a competitor goes both ways, industry participants say.

For buying a competitor's data, specifically, Frey said he would worry about "the good data they aren't going to release because it's good data and they want to use it for themselves."

There's been no hedge fund that matches Opimas' prediction created yet, though there has been databases that have transformed into hedge funds.

See more: Hedge funds are watching a key lawsuit involving LinkedIn to see if they can spend billions on web-scraped data

Financial Risk Management was one of the first hedge fund databases, and then began managing money on their own, getting up to $8 billion in assets before being bought by Man Group in 2012. CargoMetrics Technologies launched a hedge fund in 2016 based on its proprietary satellite shipping data that it had been selling to hedge funds.

But investors can be wary of these set-ups. In 2014, financial technology firm Incapture Technologies launched a hedge fund, backed by former Barclays CEO Bob Diamond, and eventually ran $150 million in assets before closing after a year, as investors were concerned about Incapture selling the proprietary technology it used in its hedge fund to competitors.

Mitchell of Hivemind believes the fears of misuse of data or internal strategy overlooks one of his company's main jobs. 

"It's a key responsibility of any software company irrespective of their origins to be extremely careful not to allow confidential information to leak from one client to another," he said. 

Still, the idea that any firm would help another — no matter how indirect —raises some eyebrows. 

"Why would I make it easier for my competitors?" Frey said.

"I don't understand it."

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• With the amount of data available growing astronomically, hedge funds continue to search for the most efficient way to filter through it all to gain an edge, all while industry margins shrink as fees drop and outflows continue.
• Open-source platforms such as QuantConnect and Quantopian are now offering hedge funds data analysis on the cheap, either through investing in a fund or licensing a freelancer's work.
• Managers who have been notoriously secretive must now decide if they want to open up their processes to freelancers online.
• Read more about the future of data on Wall Street here.

Hedge funds are sifting through so much data that they might just turn to random people online to help with it.

Alternative data streams of satellite images and cellphone-location data are where managers are now digging for alpha, as new datasets are created every day. And hedge funds have been spending serious cash searching for those who can take all this information and quickly find the important pieces.

Now, as margins shrink and returns are under the microscope, hedge funds are beginning to consider a cheaper, potentially more efficient way to crunch all this data: open-source platforms, where hundreds of thousands of people ranging from finance professionals to students, scientists, and developers worldwide scour datasets — and don't get paid unless they find something that a fund finds useful.

While funds might be desperate for help with the data, the risk of a manager's secret sauce slipping out to the masses has often stopped many from putting these platforms to work.

But open-source platforms like QuantConnect and Quantopian — which give users tools and datasets to create their own algorithms and find investment signals — are becoming increasingly popular as secretive hedge funds move toward a more collaborative approach.

Three funds — Tibra, Maritime Capital, and FME — have subscribed to license signals found by freelancers on QuantConnect, and billionaire Steve Cohen has backed Quantopian through Point72's venture arm.

See more: Hedge-fund investors are getting excited about the possibilities of machine learning. There's a good chance they don't understand it.

Their appeal is like an insurance policy on a manager's data: If you can't find anything worthwhile in it, let thousands of others try to play around with it.

To be clear, these platforms don't require hedge funds to submit their entire portfolios or trading techniques in order to review coders' work. But to incorporate a signal or algorithm made by a freelancer, funds have to at least partially let an outsider into their systems and processes, which many have historically been reluctant to do.

That's starting to change.

Citigroup and Goldman Sachs have opened some of their trading platform's code up to the public, and AQR, Two Sigma, and D.E. Shaw have let outside coders use their artificial-intelligence and data-processing tools.

"Hedge funds are going to see that being closed isn't a competitive advantage anymore," Jared Broad, the CEO of QuantConnect, a platform with 75,000 engineers who dive through datasets looking for investment signals, told Business Insider.

A surplus of data, and a shortage of data scientists

John Fawcett started his open-source platform, Quantopian, with a simple question in mind: What if there were more quants?

In 2011, when the platform was launched, Fawcett estimated there were between 5,000 and 6,000 professional quants working in investment management. The issue he saw, and believed his platform could fix, was the expected increase in data was not matched with a similar increase in quant hiring.

"There was just an incredible bottleneck of this ecosystem of data filtering into portfolios," he said.

Fawcett's platform has since expanded to 250,000 members around the world, and 4 million algorithms have been created, as coders, often with no finance background, get access to datasets and other tools that were historically closed off to those not at the biggest funds. The core of what QuantConnect and other platforms do, according to Broad, is "democratizing vast amounts of financial data."

See more: Hedge funds are watching a key lawsuit involving LinkedIn to see if they can spend billions on web-scraped data

Fawcett's Quantopian can license any of the algorithms for its hedge fund, which has $50 million in assets and money from Cohen, into community-created algorithms, paying the creators of these algorithms more than $300,000. To get exposure to the best algorithms generated on Quantopian, hedge funds can invest into Fawcett's fund like Cohen. 

The view from Point72, Fawcett said, is that there is a scarcity of talent in finance.

"We're at the beginning of this explosion of data, and the bottleneck is the community of professional quants," Fawcett said. "If you're trying to find predictive data, then you really need to look at all of it."

Tibra, a quant fund that subscribes to QuantConnect's platform, is using the database of hundreds of thousands of investment signals to help make sure it never stops trying to improve, Tibra CEO Chris Udy said in a blog. 

"One of the most challenging aspects of running a successful trading company is the continued evolution of its investment process," Udy said. 

The ability for Udy's quants and coders to be able to incorporate community-created signals into the pre-existing algorithms will make QuantConnect and others "the platform of choice for quants," Udy said. 

Balancing cost savings with security concerns

Protecting a fund's secret sauce is always going to be the biggest concern for any manager allowing its quants to collaborate on open platforms.

"[Hedge funds] haven't fully embraced those elements of collaboration and figured out how to keep proprietary stuff close to the vest while sharing the more boring stuff," Tosha Ellison, a director at the Fintech Open Source Foundation and a former executive at Credit Suisse, told Business Insider.

Even switching to operating systems on the cloud took longer than expected because of security concerns, said Two Sigma's head of technology Alfred Spector.

"We're acutely aware in the domain in which we operate that we have proprietary algorithms," he said in an interview with Business Insider.

But with managers set to spend billions of alternative datasets, there is pressure on the data scientists and quants to turn that investment into alpha, and more manpower is needed — and it isn't cheap.

See more: 'It's a cat-and-mouse game': The head of technology at $60 billion hedge fund Two Sigma explains why cybersecurity is a bigger challenge than AI

"If you're a hedge-fund manager today, you have to hire a quant, so that's recruiting and bringing this person on, getting systems set up, and then maybe in six months or a year, they will have something for you," Broad said. Compared to licensing data-driven signals from QuantConnect, this path is a lot more expensive, Broad added.

Indeed, "increasing cost constraints" is driving more financial services firms to open source, Ellison said. Top funds battle not only with each other but also with Silicon Valley for people who can efficiently grind through large datasets and model them into something useful.

What some long-running quant shops, like $94 billion manager Acadian Asset Management, have found though is that these open-source platforms eliminate the simplest of signals, making the quant space more competitive. The investment opportunities that were, at one time, able to be found only by professional quants can now be uncovered by someone playing around on Quantopian, according to Jim Dufort, Acadian's director of investment analytics and data, forcing professional quants to increase the amount of data they mine and the money they spend.

"We need to be in a position to differentiate ourselves with our clients by advancing our research, data, and tools beyond what's offered by both our competitors as well as in open source," Dufort said. "The most basic signals can be, and largely have been, commoditized."

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• Hedge funds and private equity firms are no longer staying in their lanes and are increasingly jumping between public and private markets.
• The convergence of hedge funds and private equity has led to fight for talent as both sides try to pitch prospective employees and investors that they are all-encompassing alternative-asset managers.
• It comes as the starting pool for talent in finance continues to dwindle and Silicon Valley siphons Wall Street professionals away.
• Click here for more BI Prime stories.

As massive companies stay private longer and money pours into the private markets, private-equity firms are booming. Now hedge funds that have traditionally focused on the public markets are getting in on the action.

That's creating fresh competition for talent as the lines blur between the alternative-asset managers.

Private equity and hedge funds, especially the biggest firms, are looking more like each other. Stock-picking hedge funds like Third Point Management, Tiger Global Management, and Coatue Management have invested in private companies like SoFi, Peloton, and Instacart, for example.

Traditionally, hedge funds have been more liquid and short-term-focused than their private-equity peers, with investors able to pull their money out at the end of each quarter. Private-equity investors are more patient, with the expectation that the strategy will take years to play out.

But a JPMorgan survey of institutional investors suggests that hedge funds' biggest investors — pensions, endowments, and foundations — are comfortable locking their capital with a strategy for years. More than half of endowments and foundations are comfortable with a lockup of three years or more, the survey said, while 40% of pensions are.

See more: Billionaire investor Druckenmiller says there should be only '200 or 300' hedge funds, not thousands, and he expects a culling

IDW Group founder Ilana Weinstein said some funds are "changing their stripes" to transform their strategy to focus on what their strengths are, she said, even if it means giving up some of what it means to be a hedge fund. Some long-short managers, Weinstein said as an example, are giving up on shorting and running long-only books.

The added performance pressure from more players in the alternatives space has hedge funds "having a 'come-to-Jesus' on what they are best at," Weinstein added. Meanwhile, private-equity firms have been running credit and special-situation funds that often cross into hedge funds' territory.

Historically, hedge funds have recruited from large private-equity firms' associate programs. But with the hedge-fund industry's recent struggles, 2019's hot start notwithstanding, and expected consolidation, there's been an uptick in movement in other direction, according to recruiters.

"There's a natural talent flow from hedge funds to the private market funds because that's where the [investor] interest is," Noah Schwarz, an executive recruiter for Korn Ferry who focuses on the private markets, said. "They're following the money."

See more: Inside the hellacious hedge fund money-raising environment, where 'even the big funds have to get creative'

The fight for talent between hedge funds and private equity comes as myriad other forces are pressing on financial firms, like top young prospects being siphoned away by Silicon Valley and growing margin pressure on active asset managers.

Role reversal

Top PE firms have long had public market exposure through special-situation funds, and hedge funds are trying to pry off a piece of the swollen private market for themselves.

This convergence has led both sides, especially the biggest funds, to pitch themselves to investors as full-stop alternative-asset managers, Schwarz said. Private-equity giants like KKR and Blackstone tout their dozens of different businesses on their websites like insurance and closed-end funds, while quant hedge funds like AQR and Two Sigma have liquid retail funds and a venture-capital arm, respectively.

See more: We asked 8 Wall Street recruiters about the hottest trends in hiring across banking, trading, hedge funds, and asset management

This dynamic has expanded the suitors for people who at one time would have been recruited only by one side or the other, heightening the competition between firms. It's also caused hedge funds to lose talented people and to tweak their strategies to keep investors.

Och-Ziff's cohead of investor relations, Nathan Urquhart, is now a managing director at Carlyle after more than a decade at the hedge fund, and Millennium's former head of financial planning and analysis, Shai Kopeld, joined Blackstone as a senior vice president in March. A LinkedIn search showed several early-career people jumping from analyst and associate roles at funds like Citadel and Millennium for similar roles at Apollo and KKR.

The additional competition has forced hedge funds to be more aggressive in pursuing private-equity talent, which recruiters say used to be an easy pool to pull from.

Jonathan Jones, former head of investment talent development at Point72 Asset Management, wrote an op-ed in an industry publication last summer titled "This is why hedge funds are better than private equity for M&A analysts." The piece said that one out of every five portfolio managers at Steve Cohen's firm had spent time in private equity.

"Not only do former PE associates bring with them a valuable skillset that translates well to investing in public equities, hedge funds can offer a deeper sense of ownership, early responsibility, and a path to full discretion on investment decisions (i.e., as a PM) that's hard to come by in PE," Jones' pitch reads.

See more: Hedge-fund investors have moved toward 'ultra customization,' and it's changing how funds raise money

Hedge funds have also tweaked their compensation structure to match the more steady pay of private-equity firms, Schwarz said, which has the double benefit of helping recruiting and retention. While hedge funds pay based on a fund's recent performance, private equity's longer time horizon means compensation is more consistent.

"It's just a different mindset; it is crazy the volatility in pay in hedge funds," Schwarz said.

A smaller pool

No conversation about talent in finance can happen without a reference to talent that the tech industry has pulled from Wall Street, observers say.

"The pool gets smaller and smaller," Schwarz said, as people leaving top schools pick Silicon Valley over finance.

For hedge funds, this shrinking of options has happened at the same time the industry has dealt with an investor base hyper focused on fees and performance. With another option now, prospective hires might prefer the less volatile private-equity space over the up-and-down hedge-fund industry, recruiters say.

See more: Silicon Valley has made top data-science talent too expensive for many hedge funds, so they're getting creative to compete

And the incoming talent from the most pedigreed schools who choose the biggest banks' investment-banking programs over Silicon Valley will have more power in this smaller pool, but still have to make a tough choice, Evan Zivotovsky, a founder of High Water Staffing, said.

"The ones who really dig into modeling, doing deep research dives, they are the ones who have to decide if they're more interested in public markets or leveraged buyouts and private market investing," he added.

His warning for those about to choose? "The grass is always greener on the other side."

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• JPMorgan's Highbridge Capital believes investors want more specialized hedge funds, so it is shutting down its $2 billion multi-strategy flagship fund.
• Three of the four lead portfolio managers will stay on to the run the new multi-strategy credit fund.
• More hedge funds were liquidated than launched last year, as new funds were at their lowest levels in 18 years, according to Hedge Fund Research.
• Click here for more BI Prime stories.

JPMorgan's Highbridge Capital is winding down its long-running $2 billion multi-strategy fund and will now focus on its credit business. 

The fund, which invests across fixed income, equity, macro, credit, and other asset classes, will give investors the opportunity to invest in Highbridge's new multi-strategy credit offering or get their money back by the end of the third quarter, a JPMorgan spokesperson confirmed. 

Three of the fund's four lead portfolio managers will run the new credit fund, including Mark Vanacore, the multi-strategy fund's chief information officer. The portfolio manager leaving the firm, Arjun Menon, will start his own Asia-focused fund that Highbridge and JPMorgan supports, a source familiar with the firm told Business Insider. 

The two portfolio managers that led the credit arm within the multi-strategy fund, Jason Hempel and Jon Segal, will stay on with no changes to their team. 

Read more: A $10.5 billion fund at Canyon Partners has loaded up on cash amid a shaky stock market

The change was forced by investors' preference for more specialized strategies over the firm's broad multi-strategy offering, a JPMorgan spokesperson said. 

"As markets and clients evolve, we continue to innovate and examine our alternatives offering to ensure we deliver the solutions clients want and need today and into the future," the spokesman said.

Highbridge isn't the only major fund to shut down in the past several months. More hedge funds were liquidated than launched last year, as new funds were at their lowest levels in 18 years, according to Hedge Fund Research.

The billionaires Leon Cooperman and David Tepper in the past eight months have both announced plans to turn their long-running hedge funds into family offices. BlueMountain Capital Management has responded to investors' demand for more specialized funds by axing its long-short equity and systematic stock-picking funds to focus on the credit strategies the firm made its name in. 

Highbridge Capital was founded more than 25 years ago by the billionaires and childhood friends Glenn Dubin and Henry Swieca. JPMorgan bought a majority stake in the manager in 2004 and then acquired the rest of the firm in 2009. 

Read more:Billionaire Steven Schonfeld poaches a top quant from Glenn Dubin's Engineers Gate to run a new fund

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NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

•  Hedge fund manager Daniel Sundheim of D1 Capital Partners believes Netflix stock could more than double.
• However, Sundheim was bearish on the Canadian cannabis industry, calling it the closest thing to a bubble he has seen since bitcoin.
• For more stories like this visit Business Insider's homepage. 

A year after launching his new fund, D1 Capital Partners' Daniel Sundheim told attendees of Monday's Sohn Investment Conference that his multi-billion-fund sees a lot of growth in "certain areas of media," specifically naming Netflix and Disney.

The two companies are the ones that Sundheim believes will lead the direct-to-consumer media companies in the future, a business that is somewhat insulated from start-up disruptors because it requires such extreme scale. 

On Netflix, Sundheim believes the one-time DVD delivery company will become a "boring company" because its growth will become so consistent and steady. He predicts the company will soon trade at more than $1,000-a-share, despite trading for less than half than that right now. 

"Boring can be good obviously," he said.

See more: A buzzy new activist fund is pushing for change at Wyndham Hotels to save the company money and help the environment

Despite chasing value stocks, where he pays high prices for companies that have not yet their peaks, Sundheim is very down on the Canadian cannabis industry, which "is as close to a bubble as we've seen since Bitcoin."

He called the valuations of many companies "absurd" and predicted a "supply glut."

"I think that sector has enormous downside," he said. "Growing marijuana is just inherently not a good business."

See more: Meet the 5 rising stars presenting their investment ideas at the world's highest-profile hedge-fund conference

Beyond that, Sundheim, an alum of Viking Global who raised more than $4 billion for D1 Capital, said that he has not shorted Tesla, mostly because "Elon Musk is hard to bet against."

He also advised other investors in the audience to not sell out of companies they have conviction in. He said he was proud of investing MasterCard at its IPO and selling out once it doubled in price, only to see it grow 10 times the price it went public at.

"Great businesses don't come around that often," he said. 

"Time is your friend when you have a great business," and that you should try to "compound capital over years, not months." 

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• JPMorgan's Highbridge Capital believes investors want more specialized hedge funds, so it is shutting down its $2 billion multi-strategy flagship fund.
• Three of the four lead portfolio managers will stay on to the run the new multi-strategy credit fund.
• More hedge funds were liquidated than launched last year, as new funds were at their lowest levels in 18 years, according to Hedge Fund Research.
• Click here for more BI Prime stories.

JPMorgan's Highbridge Capital is winding down its long-running $2 billion multi-strategy fund and will now focus on its credit business. 

The fund, which invests across fixed income, equity, macro, credit, and other asset classes, will give investors the opportunity to invest in Highbridge's new multi-strategy credit offering or get their money back by the end of the third quarter, a JPMorgan spokesperson confirmed. 

Three of the fund's four lead portfolio managers will run the new credit fund, including Mark Vanacore, the multi-strategy fund's chief information officer. The portfolio manager leaving the firm, Arjun Menon, will start his own Asia-focused fund that Highbridge and JPMorgan supports, a source familiar with the firm told Business Insider. 

The two portfolio managers that led the credit arm within the multi-strategy fund, Jason Hempel and Jon Segal, will stay on with no changes to their team. 

Read more: A $10.5 billion fund at Canyon Partners has loaded up on cash amid a shaky stock market

The change was forced by investors' preference for more specialized strategies over the firm's broad multi-strategy offering, a JPMorgan spokesperson said. 

"As markets and clients evolve, we continue to innovate and examine our alternatives offering to ensure we deliver the solutions clients want and need today and into the future," the spokesman said.

Highbridge isn't the only major fund to shut down in the past several months. More hedge funds were liquidated than launched last year, as new funds were at their lowest levels in 18 years, according to Hedge Fund Research.

The billionaires Leon Cooperman and David Tepper in the past eight months have both announced plans to turn their long-running hedge funds into family offices. BlueMountain Capital Management has responded to investors' demand for more specialized funds by axing its long-short equity and systematic stock-picking funds to focus on the credit strategies the firm made its name in. 

Highbridge Capital was founded more than 25 years ago by the billionaires and childhood friends Glenn Dubin and Henry Swieca. JPMorgan bought a majority stake in the manager in 2004 and then acquired the rest of the firm in 2009. 

Read more:Billionaire Steven Schonfeld poaches a top quant from Glenn Dubin's Engineers Gate to run a new fund

Join the conversation about this story »

NOW WATCH: WATCH: The legendary economist who predicted the housing crisis says the US will win the trade war

• At BattleFin's two-day conference in New York last week, 150 alternative-data companies jockeyed for the attention of data buyers from hedge funds like Credit Suisse's QT Fund, ExodusPoint, Millennium, and Third Point. 
• As hedge funds seek out new ways to beat the market, they're increasingly looking to alternative-data providers that offer obscure insight into companies not found in filings and earnings calls.
• The once under-the-radar role of data buyer has become more important than ever because they control the purse strings for a $7 billion industry. 
• Click here for more BI Prime stories.

Roberto Jedreicich gets to the point.

The decision-maker on all things alternative data at Credit Suisse's internal $650 million quant fund, QT, is flooded with pitches and meeting requests from new data vendors on the average day. But last week, at BattleFin's Discovery Day in the opulent Plaza hotel in New York, it was more of a tsunami than a flood — he had 30 official 20-minute meetings in two days and dozens of unofficial ones.

So, with limited time, he listened to these companies' abbreviated histories — how many graduate degrees their founders have, which obscure countries they have real-time data on — and started with one simple question: How does this help me and my fund? 

"I can tell pretty much right away which ones I'm interested in, and they'll know right away if I'm interested," he said in between meetings. Business Insider trailed Jedreicich over the course of a few days at BattleFin, a conference designed to match up companies that provide alternative data with buyers of that data.

Read more: Pricey data, slashed fees, and poor returns are hurting hedge funds' margins —and some are getting in the business of helping their rivals

Whether it's satellite images, credit-card transactions, or information scraped off the web, the collection of obscure data known as alternative data, which is used for investment purposes, is a growing business. A Deloitte report pegged the alternative-data market to surpass the $7 billion mark by 2020.

Data buyers like Jedreicich control the purse strings for the billions of dollars hedge funds plan to spend on this type of information. Data buying wasn't always the sexiest of roles, but as hedge funds seek out new ways to beat the market, they're increasingly looking to alternative-data providers that offer insight into companies not found in filings and earnings calls.

A sampling of the companies at BattleFin that were trying to pitch data buyers included: Zillow, the real-estate database with millions of listings; the Amsterdam-based CGLytics, which consolidates and analyzes corporate governance practices for managers with a social-impact focus; and PatSnap, a company focused on data found in new patents and research from the tech world. 

Jedreicich is Credit Suisse's one-man alternative-data team, a data veteran who has done stints at hedge funds, Deutsche Bank, and Merrill Lynch. With a data-buying budget in the millions, Jedreicich does not have a data-science or quant background. He broke into finance in Solomon's fixed-income department in the early 1990s but didn't get really involved in alternative data until his eight-year stint at Izzy Englander's Millennium, starting in 2008. He joined Credit Suisse last summer from Schonfeld Strategic Advisors.

The data-buying community is small but growing. At BattleFin, which had more than 1,000 registered attendees, Jedreicich and his peers were the center of attention.

A legal battle between Millennium's WorldQuant arm and its former data buyer Matt Ober a couple years ago showed how much funds are ponying up for the best data finders. WorldQuant had sued Ober, alleging a breach of contract because he began working for Dan Loeb's Third Point before his noncompete ended, and the lawsuit showed that Third Point was paying Ober an annual salary of $2 million. 

And now that coders have more data to play with, new startups are popping up in the alternative-data arena all the time.

It's the job of Jedreicich and his competitors to figure out which ones actually provide anything of value and which ones would just add to the data overload many hedge funds are battling. 

2 days, 30 dates

Shopping for alternative data isn't like going to the grocery store. Jedreicich is not running down some predetermined list of things he wants to buy.

Instead, he and his competitors at hedge funds like Third Point, ExodusPoint, and Balyasny Asset Management, want anything that can provide alpha — investment returns that an investor wouldn't get from an index fund that is simply mimicking the broad market. 

"My focus is bringing in alpha to the firm, everything else is second," he told Business Insider. 

Out of 100 data providers that pitch him, five to 10 get actual contracts.

"If it has alpha, we'll buy it, no matter what is, no matter how old the firm is," he said.

Read more: Hedge-fund managers are overwhelmed by data, and they're turning to an unlikely source: random people on the internet

Decked out in a fitted black suit, a matching T-shirt, and loafers with no socks, Jedreicich pressed the vendors with the same set of questions: How far back does your data go? What is pricing like? Can I run a trial with real-time data?

The last question can be tricky, he said after he finished scribbling vendors' responses on the back of business cards he just got. Not everyone likes giving away free samples after all.

"Some do [agree], some don't, but I always ask," he said.

He said he had been burned in past after backtesting historical data from a few vendors that his team found had predicted market moves before they happened. After signing a contract and ingesting real-time data, however, the investment signals disappeared, and Jedreicich thinks the historical data might have been tweaked to make the offering look more attractive. 

That's not to say he doesn't trust data vendors — in fact, he vouched for several companies in a quick lap around the exhibit hall, pointing out longtime players that he has worked with for years. RavenPack, a company based in Spain that uses natural-language-processing technology to quickly review earnings transcripts, political speeches, and more, has gotten several contracts from Jedreicich. 

Read more: Silicon Valley has made top data-science talent too expensive for many hedge funds, so they're getting creative to compete

But with any rapidly growing business, there are people looking to make a quick buck.

"It's not snake oil, but there are a lot of datasets that have no value," he said.

He wasn't handing out contracts at BattleFin. Jedreicich, if he liked a pitch, would invite the vendor to his office to meet with his chief research officer and some of his quants. From there, the backtesting of the data can take months, and he often likes to have a monthlong trial with real-time data before signing a contract.

He also asked prospective partners if other quant funds were clients. In an ideal world, the data vendor would have a few quants already signed on but not too many, so Jedreicich feels comfortable that someone else in the industry sees value in the data, but the trades generated from the data haven't become too crowded yet.

From boxed lunches to gold-trimmed plates

A lot of the alternative data for sale now didn't exist two or three years ago, Mike Marrale, the CEO of the alternative-data company M Science, said. The explosion in growth was easily visualized at a BattleFin, where just a couple years ago, attendance was a fraction of what it was last week, and lunch came in a box. On Wednesday and Thursday last week, catered lunches of farro salads and pasta were eaten off plates with gold trim. 

Vendors ponied up at least $3,000 just to attend, though many paid close to $10,000 in order to get a table in the exhibit hall. Data buyers, meanwhile, paid roughly $2,000. 

While the pace of innovation helps hedge funds get the latest and greatest, it can make pricing conversations difficult: How do you charge for something that's never been sold before?

"A lot of folks out there, they're trying to sell the first telephone," said Barry Star, the CEO of the 16-year-old alternative-data company Wall Street Horizon, which tracks corporate events. 

Read more: A growing alternative data company helps hedge funds determine if CEOs are lying using CIA interrogation techniques

Many people, Jedreicich said, think they have "million-dollar ideas. No one actually has a million-dollar idea."

"I don't like insulting the vendor, but I know what it's worth," he said. Satellite data, one of the most well-known forms of alternative data, is something he has never bought because it's too expensive and difficult to digest.

Still, budgets are growing at every firm, and hedge funds need to take chances on datasets that are unorthodox, Chris Petrescu, the head of data strategy at ExodusPoint, said.

"You need to take risks and take chances to stay competitive with others," he said on a panel.

Read more: Hedge funds are watching a key lawsuit involving LinkedIn to see if they can spend billions on web-scraped data

Longtime data buyers say that vendors initially ask for prices they'll never pay because there are so many new companies looking to buy this type of information. At BattleFin, there were panels and educational sessions targeted at how corporations can use different types of alternative data to become more efficient.

"There's a lot of newcomers in the buyer space," said Tom Liu, the CEO of ChinaScope, a data company that consolidates, translates, and analyzes Chinese media reports for Western companies.

"There's a lot of people at the edge of water beginning to wade in," he added.

That won't stop a lot of the startups that paid thousands to BattleFin from fizzling out though, Star said.

"Next year, 50% of them won't be back," he added.

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• Greg Coffey, the former star trader at GLG Partners and co-CIO of Moore Capital, is nicknamed the "Wizard of Oz."
• His new fund returned 6.9% year-to-date through the end of May 2019, according to a private database viewed by Business Insider. That beat the average macro fund over the same period.
• Kirkoswald Capital, named after the Australian street Coffey has a house on, launched last year in London and has since moved its trading desk to New York. 
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The hedge fund world's "Wizard of Oz" has gotten off to a promising start in 2019 despite a tough environment for macro managers. 

Greg Coffey — the former star trader at GLG Partners and Louis Bacon's co-CIO at Moore Capital — saw his new fund, Kirkoswald Capital, return 6.9% year-to-date through the end of May, according to a private database viewed by Business Insider. 

The average macro fund returned 2.7% over the same period, while the average hedge fund returned 5.3%, according to Hedge Fund Research data.

The fund posted a 1.1% return in May while the average hedge fund fell 1.5%, the data show. Kirkoswald, which focuses on emerging markets, has more than $1 billion in assets. 

The firm declined to comment. 

See more: JPMorgan's Highbridge Capital is unwinding a $2 billion fund and now turning to investor demand for credit

Coffey returned to the game in 2018 after taking six years off from investing to spend more time with his family in his native Australia. It was then reported late last year that he was moving his firm's trading desk from London to New York, partially because of Brexit's impact on London's role as a top financial center. 

Coffey's star was made at GLG Partners before the financial crisis as a macro trader, after which he joined Louis Bacon's Moore Capital in 2008. He ran two emerging-markets funds there, and was a co-CIO of the firm, but failed to replicate the level of his GLG success and retired after four years at the age of 41. 

When reports first surfaced that Coffey was coming back to start his own fund, $2 billion was the number floated as the target he was trying to raise. But investors were allegedly wary due to his time off from trading. Billionaire Bacon however supported Coffey both through his fund and personally, according to reports. 

Investors have been disinterested in macro funds, despite the solid performance. A recent report from eVestment found that investors pulled $6.2 billion from macro funds in May and $12.1 billion for the year. 

See more: Here are the hedge-fund managers to watch in 2019 as the industry battles poor performance

SEE ALSO: Hedge funds’ secret sauce is obscure data like satellite images. Here’s how the people in charge of spending millions on this data find the stuff worth buying.

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• Gabe Plotkin's $7 billion Melvin Capital has notched returns over 35% through May, sources say, after finishing last year down 7%.
• Plotkin's fund, which was launched at the end of 2014 with a $200 million seed from his former boss Steve Cohen, invests primarily in the tech and consumer sectors.
• Plotkin said at May's Sohn Investment Conference that he has also been able to make money on his shorts, and said he was skeptical of shopping mall REITs and Tesla. 
• Click here for more BI Prime stories.

One of the top hedge funds this year is Melvin Capital, a $7 billion long-short equity fund managed by Gabe Plotkin.

The fund has returned more than 35% this year through the end of May, sources say, bouncing back from a disappointing 2018 when the fund lost 7%. 

Plotkin, who was once one of Steve Cohen's top money-makers at SAC Capital, launched his fund at the end of 2014 with a $200 million seed investment from his billionaire boss. He reportedly ran a portfolio of more than $1 billion while at SAC, and his current fund focuses on the same sectors — tech and consumer — that he invested in under Cohen.

The firm declined to comment. Melvin's performance was previously reported by industry publication Institutional Investor. 

See more: A $10.5 billion fund at Canyon Partners has loaded up on cash amid a shaky stock market

Filings show that Plotkin's top holding is Netflix, and he also large positions in Nevada-based resort chain Las Vegas Sands and payment processor Worldpay. At the Sohn Investment Conference in New York, he told attendees that he has an "intense focus" on the short side of his portfolio, naming Tesla and mall REITs as securities he is bearish on. 

Last year, it was uncovered that Plotkin made a $400 million bet against Nintendo's stock. 

The fund has grown its assets rapidly as well during a time frame when hedge funds have fallen out of favor. Less than two years ago, Melvin managed roughly half of the assets it has today.

The 35% mark the firm has notched so far easily outstrips the average hedge fund, which has returned 5.3% through May, as well as the overall market, which has gone up 9.8% in the same time period. 

See more: Multi-billion-dollar hedge fund manager Daniel Sundheim is pumping up Netflix, but dismisses the Canadian pot industry

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• The 10th edition of Anthony Scaramucci's SALT conference brought nearly 2,000 people to Las Vegas' Bellagio hotel this week and diverted from its prior focus on just hedge funds.
• Politicians, not hedge fund managers, were the big-name speakers, and the investing community in attendance was geared more toward the buzziest topics of the day, like so-called opportunity zones, cannabis, and crypto.
• For more stories like this, visit Business Insider's homepage.

LAS VEGAS — Missing from Anthony Scaramucci's SALT conference speaker list this year were the hedge fund titans who have headlined the conference in the past, like the billionaires Steve Cohen and Bill Ackman.

Marc Lasry, the Avenue Capital founder, was a late scratch from the agenda, as he chose to watch the NBA team he owns, the Milwaukee Bucks, instead of flying to Las Vegas. And of the 23 featured speakers at the conference this week, fewer than half are current investors.

The Las Vegas conference this year, its 10th edition, instead expanded beyond its hedge fund roots, vacillating between panels on buzzy topics like cannabis, so-called opportunity zones, and crypto, and talks from former confidants of President Donald Trump, like Chris Christie, John Kelly, and Jeff Sessions.

The shift away from hedge fund headliners comes as the industry is struggling with performance issues. Even as funds gained an average of 5.4% in the first quarter, nearly $15 billion left the industry in the period, according to eVestment.

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Held at the sprawling Bellagio resort and casino, with extensive security — replete with bomb-sniffing dogs — sectioning off the conference from the slot machines, the blowout brought together an eclectic mix of politicos, advisers, hedge fund managers, and cannabis-producing CEOs in the return from its one-year hiatus. Last year, Scaramucci, briefly a White House communications director under Trump, didn't hold the conference as a Chinese conglomerate was in talks (that later collapsed) to buy his firm, SkyBridge Capital.

A partisan nonpartisan event

SALT describes itself as nonpartisan, but the conference featured a heavy tilt toward Scaramucci's former employer.

While the Obama administration alums Susan Rice and Valerie Jarrett made appearances, the loudest panelists were Trump supporters like Christie, while conservative media figures like Charlie Kirk could be seen doing live shots on one of several balconies overlooking poolside cabanas.

The biggest talks at the end of both days were with Kelly, Trump's former chief of staff, and Nikki Haley, the former UN ambassador. Even on the smaller stage, Trump-connected people like David Bossie, Stephen Moore, and Corey Lewandowski made appearances.

A midday conversation among Christie, Sessions, and MSNBC's Stephanie Ruhle was standing room only.

Still, the biggest cheers were not for either party but general anger at both sides — sentiments expressed by Sam Zell and former Countrywide Financial CEO Angelo Mozilo, who implored people to call their representatives to get politicians working for them.

Stays in Vegas

But despite the lack of hedge fund star power, the conference had the second-highest attendance in its history, with nearly 2,000 attendees.

One longtime attendee from a fund said it had gotten harder for investors to persuade compliance to let them come to Vegas for conferences, opening the door for more people from cannabis, bitcoin, and technology to fill the void.

David Bahnsen, a wealth adviser who said he had been to nearly every SALT conference, said it was easily the youngest crowd he had seen, something he attributed to the shift in focus to the buzziest investment topics of the day.

When you attend SALT, one longtime attendee said, you're there for more than just catching up with investors.

"You go to see famous people walking around, and they nailed it," this person said, mentioning that he had just bumped into Mark Cuban taking a selfie with a couple of fans.

You can meet investors at any conference, this person said, but the chance to rub shoulders with celebrities is what makes SALT big.

But with hedge funds' margins shrinking, it can be a hard pitch to get the OK to come to a conference in a Vegas casino rather than one at a Dallas convention center, another attendee said.

"You never know who is going to wake up the next morning here," this person said on a balcony overlooking one of the Bellagio's many pools.

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• Gabe Plotkin's $7 billion Melvin Capital has notched returns over 35% through May, sources say, after finishing last year down 7%.
• Plotkin's fund, which was launched at the end of 2014 with a $200 million seed from his former boss Steve Cohen, invests primarily in the tech and consumer sectors.
• Plotkin said at May's Sohn Investment Conference that he has also been able to make money on his shorts, and said he was skeptical of shopping mall REITs and Tesla. 
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One of the top hedge funds this year is Melvin Capital, a $7 billion long-short equity fund managed by Gabe Plotkin.

The fund has returned more than 35% this year through the end of May, sources say, bouncing back from a disappointing 2018 when the fund lost 7%. 

Plotkin, who was once one of Steve Cohen's top money-makers at SAC Capital, launched his fund at the end of 2014 with a $200 million seed investment from his billionaire boss. He reportedly ran a portfolio of more than $1 billion while at SAC, and his current fund focuses on the same sectors — tech and consumer — that he invested in under Cohen.

The firm declined to comment. Melvin's performance was previously reported by industry publication Institutional Investor. 

See more: A $10.5 billion fund at Canyon Partners has loaded up on cash amid a shaky stock market

Filings show that Plotkin's top holding is Netflix, and he also large positions in Nevada-based resort chain Las Vegas Sands and payment processor Worldpay. At the Sohn Investment Conference in New York, he told attendees that he has an "intense focus" on the short side of his portfolio, naming Tesla and mall REITs as securities he is bearish on. 

Last year, it was uncovered that Plotkin made a $400 million bet against Nintendo's stock. 

The fund has grown its assets rapidly as well during a time frame when hedge funds have fallen out of favor. Less than two years ago, Melvin managed roughly half of the assets it has today.

The 35% mark the firm has notched so far easily outstrips the average hedge fund, which has returned 5.3% through May, as well as the overall market, which has gone up 9.8% in the same time period. 

See more: Multi-billion-dollar hedge fund manager Daniel Sundheim is pumping up Netflix, but dismisses the Canadian pot industry

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• Hedge funds got out to a roaring start in 2019, but have slipped since, with the average fund underperforming the overall market.
• Investors, many of whom put up with net losses in their hedge fund portfolios last year, have been pulling money by the billions. 
• More hedge funds were liquidated than launched in the first quarter of the year, the third quarter in a row that has happened, and this year has lacked the mega-launches that dominated last year's headlines. 
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The $3.2 trillion hedge fund industry is not having a good time so far this year. 

While investors going into 2019 were optimistic about their hedge fund portfolios, the industry's underperformance — returning 5.3% on average through May compared to the S&P returning nearly 10% during the same time — has led to more than $25 billion in redemptions, according to data tracker eVestment. 

These poor returns have coincided with investor demand for lower fees and increased transparency, simultaneously pushing long-time players out of the space while raising the bar for new entrants. 

"The industry is enduring a consolidation drive primarily by the ability, or inability, of managers to produce returns in-line with investor expectations," according to an eVestment report. 

Aspiring hedge fund founders have not been encouraged to try their hand as more hedge funds were liquidated in the first quarter than launched, according to Hedge Fund Research. It was the third straight quarter the total number of funds have declined.

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Unlike last year, 2019 has not matched big-name liquidations with big-name launches. Billionaire David Tepper is returning outside capital as he shifts his well-known hedge fund, Appaloosa, into a family office. However, there are no launches yet scheduled for this year to match the assets or hype of Michael Gelband's ExodusPoint or Daniel Sundheim's D1 Capital Partners going live last year.  

So far, the biggest expected launches this year are coming from Citadel alumni, like Jack Woodruff, Mike Rockefeller, and John Graham, the biggest of which — Woodruff's coming fund and Rockefeller's Woodline Capital —are expected to launch with roughly $1 billion. Last year, Gelband set the record for the biggest launch with $8 billion. 

For new launches to be successful, significant day one assets are needed, even for managers with the best connections.  A recent report by Goldman Sachs' prime brokerage desk found that hedge funds with less than $250 million had less than a 50-50 chance of surviving their first three years of trading. Meanwhile, those that start with more than $1 billion in assets are able to make it past the three-year mark 84% of the time. 

See more: A $10.5 billion fund at Canyon Partners has loaded up on cash amid a shaky stock market

Still, industry giants expect the ongoing consolidation to continue. Billionaire Stan Druckenmiller said that there's only five to 10 people worth the fees hedge funds charge, and Oaktree Capital founder Howard Marks believes young investors don't have the same opportunities to start funds like he and others did decades ago.

"We need to get to back 200 or 300" funds, Druckenmiller said at a New York Economic Club event last month. 

See more: Inside the hellacious hedge fund money-raising environment, where 'even the big funds have to get creative'

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• Big names like David Tepper and Leon Cooperman have opted to close their hedge funds instead of transitioning their business to new management, but investors see more and more founders planning for their funds to live on without them. 
• Fund managers have built teams that invest across asset classes, which reduces reliance on the trading acumen of a single person.
• Succession planning can be harder than it looks. Bridgewater founder Ray Dalio told Business Insider he was stunned by the amount of work it took and shared what he learned about the process. 
• Click here for more BI Prime stories.

Hedge funds have long been nearly synonymous with their founders' strategies and personalities, but investors are now looking closely at firms' plans to carry on without their creators at the helm.

Investors say more and more funds should be able to survive a leadership transition. But Ray Dalio, founder and cochief investment officer of Bridgewater, the world's largest hedge fund, told Business Insider it was hard for him to pinpoint how long his succession planning would take. 

"When I began my succession process, I thought it was going to take me probably about two years. But when I say I thought that, I also knew not to believe that," said Dalio on a recent episode of Business Insider's "This Is Success" podcast.

As founders age and the hedge fund industry matures, succession planning is a critical question for investors and potential fund employees. Many of the biggest funds have evolved beyond simply managing one portfolio and now offer a range of services, which makes it more plausible for a successor to take charge. 

"They're companies, they're small corporations, they're not one PM with an analyst running a single portfolio," said Darren Wolf, global head of alternative investment strategies at Aberdeen Standard Investments. "They're set up to be evergreen structures way beyond a single PM."

See more: Billionaire investor Stanley Druckenmiller says there should be only '200 or 300' hedge funds, not thousands — and he expects a culling of the herd

What remains unclear is exactly which fund managers will want their company to live on after they're done working.

Several big-name managers opted to close shop in the last 18 months instead of turning over to a longtime lieutenant. Billionaires David Tepper of Appaloosa Management and Leon Cooperman of Omega Advisors are converting their funds into family offices. Jason Karp closed Tourbillion and is now helping with his wife's organic chocolate company. John Paulson closed his London office recently, and hinted last year that he was close to transitioning his hedge fund into a family office.

But there have been some succession success stories. Farallon Capital is back at the assets under management it reached before founder Tom Steyer stepped down in 2012. Dallas-based HBK Investments has been successful despite the firm's founder and namesake, Harlan B. Korenvaes, retiring in 2003. Large quant funds like Renaissance Technologies and D.E. Shaw have ceded day-to-day control to lieutenants while founders James Simons and David Shaw focus on research and other passions.

"An increasing number of hedge funds can absolutely handle a succession," said Joseph Burns, head of hedge fund due diligence for iCapital Network, because they are diversified asset managers with venture capital and private investment arms.

Still, giving up a business you started and grew isn't easy, something Dalio found out when he tried to transition out  role at Bridgewater, only to step back in when his replacement, Greg Jensen, was overloaded with top investment and management responsibilities.

Bridgewater is currently run by Co-CEOs David McCormick and Eileen Murray, while the Dalio, Jensen, and Bob Prince all share the CIO role.

'Go out and hire a replacement'

Legendary hedge fund manager Julian Robertson drew investors in because of his personality and strategy. Naming a successor for Tiger Management would have made a lot of existing investors uneasy, according to research from Sandy Gross at executive search and coaching firm Pinetum Partners, but the seeding of his proteges' funds let investors know who he backed without forcing them to make a decision about staying with Tiger under a new leader.

But more recently, Gross found in interviews with senior hedge fund personnel that mega-funds are expected to continue beyond the founder. One unnamed COO told Gross that "there is an expectation we live beyond our founders" today, and not close down just because the founder is ready to retire.

"There are plenty of geniuses on Wall Street, so it shouldn't be hard to go out and hire a replacement," an unnamed hedge fund CFO told Gross.

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Wolf said Aberdeen goes into hedge funds "wanting to be invested for a long time."

"We do a lot of due diligence before making an investment, so we want to amortize that time and cost across a long period of time," he said.

Well-known platforms like Point72, Millennium, and Citadel are inherently tied to their billionaire founders, but are made up of hundreds of investment teams and professionals who often operate autonomously. For investors, this structure is viewed as a strength.

"We don't like to see too much of the talent concentrated at the founder level," Wolf said.

Bridgewater's Dalio said that anyone thinking of going down the succession path to should allocate plenty of time. He figured the process would take two years, but gave himself 10, he said on the podcast.

"If you haven't done something three times before successfully, don't bet on your ability to do it," Dalio said. 

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• The CFA Institute released new performance-reporting standards on Tuesday, and the $3.2 trillion hedge fund industry will have to decide if it wants to opt in to the updated rules.
• Industry watchers say reporting guidelines would help crack down on managers warping returns with cherry-picked stats.
• The standards for a manager to claim compliance require hedge funds to be more upfront about past performance even if a strategy has closed or been changed. 
• "Hedge funds are salespeople, they want to raise assets and maintain assets," said Jon Caplis, founder of PivotalPath, a performance database used by hedge fund investors. 
• Click here for more BI Prime stories.

Hedge fund performance has been underwhelming. An influential professional organization has overhauled its reporting standards in order to bring more funds into the fold, but adoption would force portfolio managers to give up tactics to make returns look better. 

The notoriously opaque hedge fund industry has never widely adopted any broad guidelines for calculating performance figures. Managers can overstate returns by selective reporting, observers say, and many are supportive of centralized, transparent rules.

It's another example of the transformation the once-niche industry has made into a more institutional business, with pensions and endowment investors now limiting the big, concentrated bets funds used to be famous for taking as the bar continues to be raised for new launches. 

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The CFA Institute released its 2020 Global Investment Performance Standards on Tuesday that will take effect on Jan. 1. The new standards are designed to appeal more to hedge funds and other alternative asset managers, and differ from existing guidelines, by allowing managers to report performance for individual funds without having to disclose firm-wide performance, said Karyn Vincent, head of global industry standards at the CFA Institute.

The current guidelines, which went into effect in 2010, were not widely adopted by hedge funds, Vincent said, and making the standards more flexible and appealing for more types of managers was a guiding factor in crafting the next iteration. 

Funds have been able to overstate returns using tactics like giving net performance figures on assets held by the founder that aren't charge fees, or only reporting performance in a closed-off fund for select investors instead of an overall performance figure, wrote Don Steinbrugge, who runs hedge fund consultancy Agecroft Partners, in a recent paper. 

"Today, there is no consistency across the hedge fund industry in how net performance is calculated and presented. There is some consistency in performance and risk disclosures, but they provide very little clarity. Most disclosures offer worst-case scenarios as hedge fund law firms seek to limit their client's liability," the paper from Steinbrugge reads. 

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Hedge funds have been less restricted in how they could market themselves since the JOBS Act passed in 2012, and industry observers say they have also been even more aggressive in selectively picking performance numbers.

"Hedge funds, after all, are salespeople, they want to raise assets and maintain assets," said Jon Caplis, founder of PivotalPath, a service that provides performance data for hedge fund investors. While Caplis and others don't believe managers often lie outright about performance, the lack of standard reporting means they can take measures to make returns look as good as possible. 

"I believe there's a significant problem with cherry-picking performance in the industry," said Dev Kantesaria, founder of $450 million hedge fund Valley Forge Asset Management. 

Big managers may offer increasingly popular"funds-of-one" for big investors along with their main fund that have different fee structures and investments. Steinbrugge says it should be clear to investors if performance is radically different between separate structures in the same strategy.

While many funds agree in principle that some type of standard for performance reporting is needed, Kantesaria said the hard part will be reaching an industry-wide agreement on how enforcement should be overseen. Some funds may prefer a regulator like the SEC take up the issue, not an organization like the CFA Institute.

"And in the end, if there is agreement on someone to run, you've got to get a lot of people who are pretty protective of their information to share it. It won't be easy," Kantesaria said. 

See more: Hedge funds are failing left and right and billionaire investors say the carnage has only gotten started

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• New alternative data companies are popping up everyday, and hedge funds are getting overwhelmed by choice. Some have developed a way to evaluate data more quickly.
• Two hedge funds, Balyasny and WorldQuant, have built online portals where sellers can plug in their datasets. The fund managers then quickly relay what data they find valuable.
• While the process saves hedge funds time, some sellers believe that the lack of human touch will cause funds to miss out on valuable datasets.
• Click here for more BI Prime stories. 

Hedge funds are trading on unconventional data like satellite images and corporate air travel trackers to gain a competitive edge, but picking out useful information is getting harder as data vendors multiply. Funds like WorldQuant and Balyasny want to streamline that process.  

So they set up online portals — called Data Exchange at WorldQuant and Antenna at Balyasny — to let sellers upload data and get quick feedback on what's valuable for the funds. 

"This is a real transparent way to show our vendors 'here's what we are looking for,'" said Carson Boneck, chief data officer for Balyasny. 

"You're going to be put at the top of the queue if Antenna identifies something of value."

See more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.

Hedge funds are fighting tooth and nail for every basis point of performance. And the entire industry — including quant firms and traditional stock-pickers — is planning to spend billions on alternative data, which has sparked an explosion of new providers. 

After a year where the average hedge fund lost money, 2019 has been kinder to hedge fund managers, with the average fund posting a 7.6% return through the end of June, according to Hedge Fund Research. This figure however trails the overall market and has not stopped investors from redeeming tens of billions of dollars this year.

Hedge fund managers have traditionally found interesting data sets through data-buyers who attend conferences like BattleFin, but the volume of new data providers and datasets has forced managers to come up with other approaches. The number of alternative data sellers has nearly quadrupled over the past ten years, up to 412 firms in 2018. 

"In sorting through all of these new vendors, we are trying to find a way to increase the probability that we find something our investors would value, and that would be useful for our portfolio managers and quants," Boneck said.

The quicker data can be vetted and integrated, the more useful that data is, portfolio managers say. An investment signal may disappear, or it can be picked up by others who crowd the trade. 

"You get a short-term advantage, but then it closes because everyone else catches on," said Dev Kantesaria, founder of $450 million hedge fund Valley Forge Asset Management.

'Data still needs human interaction'

Balyasny's Antenna is a quantitative review of the dataset that "isn't the end-all, be-all," Boneck said, but the program, which started at the beginning of 2018, "covers a lot of the initial bases."

"It certainly makes me more comfortable purchasing data when I know it's passed all of these objective tests."

See more: Hedge-fund managers are overwhelmed by data, and they're turning to an unlikely source: random people on the internet 

For some vendors in the still-new alternative data space, this type of review is helpful in pinpointing what their product is worth — especially since many companies are selling something that has never been sold before.

"In terms of pricing in the market, it's really all over the place," said Sarah McKenna, COO of Sequentum, which builds software for managers to web-scrape data. "It's almost easier to have them bid then for us to state a price."

But some vendors are concerned a quant system might not be able to pick up on the intricacies of their datasets like a human would.

"Data still needs human interaction," said Zak Selbert, CEO and founder of Indexica, a company that uses machine-learning to review and analyze transcripts, media reports, public filings, and more.

Selbert said he understands why hedge funds want to streamline the data-review process, but warns that "a lot of funds would miss out on a lot of good data, if this spreads."

"My hope is that it's just a screening tool, and not a decider. Because if it's the decider, people will only ingest data that has this statistically predictive, immediate look to it, and not dive deeper into others."

See more: Pricey data, slashed fees, and poor returns are hurting hedge funds' margins —and some are getting in the business of helping their rivals

Boneck understands Selbert's and others' concerns, and said that "we're always going to need to go deeper into data."

Balyasny at the moment has no plans to white-label the Antenna algorithm for general use by other funds. There has been a growth in third parties that are running platforms with pre-vetted data vendors on it like Bloomberg and BattleFin, which recently rolled out a service called Ensemble.

This step will help clean up the space, Boneck said, but won't replace the vetting done by Balyasny and others.

"We're always going to need to test it ourselves."

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• Glenn Dubin and his wife, Eva Andersson Dubin, have been friendly with disgraced financier Jeffrey Epstein for decades.
• A Business Insider investigation revealed new ties between the Dubins and Epstein, including a letter from Eva Dubin telling Epstein's probation officer that he could be around their children ahead of Thanksgiving. 
• Before Epstein went to jail in 2008 for charges including procuring a minor for prostitution, he and Glenn Dubin invested millions in a hedge fund deal that went south, detailed by Business Insider for the first time. 
• After Epstein got out of jail, Eva Dubin set up a foundation so that Epstein could donate to her breast cancer charity without his name attached. 
• This is a preview of the full inside story on the ties between Epstein and the Dubins, which is available exclusively to BI Prime subscribers.

A prominent hedge fund manager and his model-turned doctor-turned philanthropist wife had longtime ties to disgraced financier Jeffrey Epstein – and their relationship didn't end when Epstein went to jail for prostitution in 2008. 

Instead, Glenn and Eva Dubin invited him to their home for a large Thanksgiving celebration in 2009, after he served 13 months in jail. Before the holiday, Eva Dubin wrote to Epstein's probation officer in an email obtained by Business Insider to say she and her husband were "100% comfortable" with Epstein around their children, including their then-teenage daughter. 

An investigation by Business Insider revealed that the billionaire Dubins, well known in New York and Palm Beach circles, had numerous financial, social, and philanthropic ties to Epstein. While the couple didn't end their relationship after Dubin went to jail in 2008, they're now trying to distance themselves from the sex offender. Through a spokesperson, they said that Eva Dubin had known Epstein for decades and thought he rehabilitated himself after his plea to charges including procuring a minor for prostitution. 

"The Dubins are horrified by the new allegations against Jeffrey Epstein," a spokeswoman said in a statement. "Had they been aware of the vile and unspeakable conduct described in these new allegations, they would have cut off all ties and certainly never have allowed their children to be in his presence."

The Dubins are the latest high-profile Wall Street family to come under scrutiny for ties to Epstein. Last week, Business Insider revealed that Epstein was the director of the private-equity guru Leon Black's family foundation from at least 2001 through 2012. The Blacks later said he resigned in 2007 and that they submitted erroneous tax forms for years. 

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