Oct. 31, 2019
Oct. 31, 2019
Five Essential Alternative Data Articles for Private Fund Managers
Private fund managers are increasingly using alternative data in their investment processes. Correspondingly, the SEC has been taking a greater interest in managers’ use of alternative data and may be conducting a thematic review of the subject, with a possible examination sweep to follow. Given the wide range of risks posed by its use – from insider trading to copyright infringement to data privacy violations – the Hedge Fund Law Report is highlighting five articles from its archives that explore how fund managers can properly use alternative data. Next week (the week starting November 4, 2019), the Hedge Fund Law Report will resume its normal weekly publication.
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A Fund Manager’s Roadmap to Big Data
The exponential growth of information technology systems has given researchers, governments, corporations and fund managers the ability to identify correlations and patterns from a combination of previously unlinked data sets with incredible speed. “Big data” often refers to the use of predictive analytics, which extract value from those data sets. Raw data can be collected from a variety of sources, including user interactions on the internet, satellite images, consumer transactions and industry trends. Although only a small minority of fund managers comprehensively capture value from this data, spending on big data continues to increase, with fundamental-driven investors seeking to enter the environment. Building an internal infrastructure to acquire and process raw data is a time-consuming and expensive undertaking. As a result, most fund managers look to third-party data vendors to not only generate alpha, but to respond to new regulatory requirements; reduce costs; and assist with other operational and managerial functions. The first article in this three-part series explores the big-data landscape and how fund managers can acquire and use big data. The second article analyzes issues and best practices surrounding the acquisition of material nonpublic information; web scraping; and the quality and testability of data. The third article discusses risks associated with data privacy, the acquisition of data from third parties and the use of drones, as well as ways fund managers can mitigate those risks. For more on the adoption by fund managers of new technology, see our three-part series on blockchain: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).
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Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping
On April 13, 2017, craigslist obtained a judgment against RadPad, a third party that collected data through automated means from its site. The $60.5‑million judgment was based on various claims relating to RadPad’s use of sophisticated techniques to evade detection and harvest content from craigslist’s site, as well as distribution of unsolicited commercial emails to craigslist users to market RadPad’s own apartment rental listing service. The case highlights some of the issues faced by persons, such as hedge fund managers, who collect – or engage others to collect – data through automated means for commercial purposes. In a guest article, Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger and Joshua M. Newville provide an overview of big data and web scraping; outline potential sources of liability to hedge fund managers that collect big data; and describe best practices for navigating several areas of potential liability. See also “Tips and Warnings for Navigating the Big Data Minefield” (Jul. 13, 2017).
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How the GDPR Will Affect Private Funds’ Use of Alternative Data
The E.U.’s General Data Protection Regulation (GDPR), which took effect May 25, 2018, primarily affects investment managers and private funds that are based in the E.U. The GDPR’s restrictions on the processing of “personal data” of individuals in the E.U., however, may affect managers and funds that are located outside the E.U. if they process the data of individuals located in the E.U. in connection with the offering of services to those individuals. Because more funds are using alternative data in their operations – notably in driving their trading strategies and making investment decisions – the GDPR may affect how these funds obtain and use alternative data if that data contains what is arguably considered the personal data of individuals in the E.U. To help readers understand the potential impact of the GDPR on funds’ use of alternative data, the Hedge Fund Law Report interviewed Peter D. Greene, partner and vice-chair of the investment management group at Lowenstein Sandler. This article presents his insights. For more on the GDPR, see “How Fund Managers Can Navigate the E.U. General Data Protection Regulation and the Cayman Islands Data Protection Law” (Aug. 9, 2018); and our two-part series “What Are the GDPR’s Implications for Alternative Investment Managers?”: Part One (Apr. 26, 2018); and Part Two (May 10, 2018).
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FINRA RegTech Conference Examines Big Data and Other Emerging Technologies
Regulatory technology (RegTech) aims to improve regulatory compliance by automating processes; facilitating reporting; and using advanced data analytics to identify and manage risks. FINRA recently convened a group of regulators, financial services firms and RegTech experts to explore the growth of RegTech and its associated benefits and challenges. This article covers, among other topics, the portions of the FINRA 2019 RegTech Conference that examined big data, its connection to artificial intelligence and how both can be used to improve compliance. See “Cordium and Aite Group Survey Benchmarks Use of ‘RegTech’ by Asset Management Firms” (Feb. 8, 2018).
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Fund Managers Should Prepare for Further Disruption to the Industry or Risk Being Left Behind
As private fund managers continue to face headwinds on multiple fronts, one thing remains clear: disruption will continue. Notwithstanding these challenges, enormous opportunities are available to those willing to adapt their business plans accordingly. These points came across in an interview the Hedge Fund Law Report conducted with Anthony Cowell, partner and head of alternative investments at KPMG in the Cayman Islands. Cowell discussed key disruptors that fund managers should be prepared to embrace, including the use of alternative data and the broader digitization of the alternative investment industry, and this article presents his insights. See our three-part series on artificial intelligence: “How to Use It to Streamline Operations” (Sep. 5, 2019); “Government Guidance, Service-Provider Negotiations and Risks of Bias” (Sep. 12, 2019); and “Automating the Legal Department and Maintaining Privacy” (Sep. 19, 2019).
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