Alternative Data in the Crypto Hedge Fund Industry

Hedge Funds have been historically pioneers in the financial sector. This is due to more of a necessity rather than a choice. At the end, the survivorship of the industry relies upon on the continuous search of Alpha.

Yes, this type of investment vehicles does not have the luxury of be able to endure long periods of time by simply playing from the base line in the form of tracking a Benchmark index. Furthermore, Bailouts in case of insolvency either recklessly or negligently like in the banking sector is not available either.

Here is where the old saying “necessity is the mother of all inventions” is more relevant than anywhere else.

That’s why Hedge Fund professionals must use every possible data source available to test and confirm investment hypothesis. The competition is intense, and it is simply not possible to wait an entire quarter to listen a CFO on an earning call to determine if the long or short strategy on that stock worked out as planned.

In conversations with colleagues and friends from the Traditional Hedge Industry, I have had the privilege to learn from truly experts the value of alternative data sets such as web searches, social media sentiment, regulatory filings, telecom industry data or weather info in the construction of a comprehensive investment strategy.

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However, when it comes to the Crypto Hedge Fund industry, how can we determine what is alternative data within an already alternative niche in a non-traditional corner of the financial sector?

Well, please bear with me and allow me to present what in my opinion could be considered a safe definition.

I would say that apart of pricing info in the form of candle charts and volumes, everything else could be tagged as alternative given how decentralized and atomized the data is.

Would it be possible to do the job in this industry without BTC dominance, Number of new wallets, hash rate for PoW blockchains, volumes in Exchanges, Whale info, gas fees, Total Value Locked and Defi lending rates?

No mention that since crypto is probably the most social sector in the financial world now, market sentiment obtained out of networks such as twitter and telegram channels is probably one of the most sought data sets that a Hedge Fund Manager would desire to possess.

The bottom line of this story is that in the absence of a generally accepted structure of financial and technical data to evaluate investment decisions in crypto protocols, the room and the opportunity to obtain Alpha is still considerable given the current asymmetry of the available information.

Smart Data providers are going to take advantage of this market and try to close the gap as soon as possible in the form Bloomberg like information software or specialized databases but in my view, this will take them something between 6 to 12months at least.

Yours in Crypto