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Macro-Data Drives Hedge Fund Strategies

March 8, 2023 | By: Ivy Schmerken

Financial markets are reacting to macro-events and news much faster than in the past, prompting hedge funds and other buy-side firms to hunt for new signals in data feeds.

Experts on a recent webinar hosted by Wall Street Horizon (WSH) said that hedge funds and other buy-side trading desks are coping with faster reactions and market reversals in response to data releases and earnings sentiment.

New releases of macro-data have caused traders and investors to adjust their expectations, sparking volatility in markets and anxiety about the path of U.S. interest rates.

A big issue has been the inflation rate. Investors kicked off 2023 with optimism that stubborn inflation had eased, which drove a significant stock market rally in January. With signs that inflation has cooled off, many were betting the Federal Reserve would cut interest rates in the second half of the year, reported The Wall Street Journal.

But a series of recent “hot” data points released in February on consumer prices, supplier prices and the tight labor market, suggested that the U.S. economy grew more than economists expected in January, which made investors concerned that the Federal Reserve would continue to keep interest rates higher for longer.

For example, a report from the Labor Department on Feb. 14 showed that the consumer price index (CPI) had cooled off slightly at the start of 2023 from its peak to 6.4% in January with energy, housing, food, and other items, keeping up the pressure on prices, reported the WSJ.

“It’s certainly been a macro-driven market for several years. Inflation is driving investor sentiment. But what happens in 2023 with Fed policy is going to be more nuanced,” said Asha Mehta, Managing Partner and CIO at Global Delta Capital, a systematic investment manager, who spoke on the Jan. 12 webinar “Data Minds: Navigating 2023’s Bear Traps Using Data-Driven Signals.”

While quant hedge funds who had exposure to the value sector did well in 2022, Mehta predicted that more than one style effect would be drivers of performance in 2023. “I agree that macro is relevant, but coming into 2023, I see this much more of an active stock picker’s market,” said Mehta.

Data and Trading Opportunities

Doug Clark, Managing Director of Equity Market Design at TMX Group, said data on the China reopening trade and inflation were two opportunities for equity traders to focus on. When searching for opportunities on Chinese stocks, Clark advised investors and traders to look at shipping data, corporate event data, and P&L data on various exporters and shipping firms.

“Hedge funds are asking about more macro data sets,” said Chris Petrescu, CEO of CP Capital, a data consultancy to hedge funds, who spoke on the webinar,” in a follow-up interview. “Even if they’re not a macro-hedge fund they still need a view of the health of the consumer and interest rates,” he said.

On Feb. 21, when home improvement retailers released a forecast of lower profits for the year, this showed that consumers were spending less on expensive goods such as big appliances and home remodeling. Other earnings reports showed that consumers were spending more money on food and basic essentials due to rising prices.

In response to the data reports, U.S. stock market indexes suffered severe declines as it suggested that consumers were changing their spending habits.

“Traditionally hedge funds didn’t care about this data because consumer health wasn’t tied to a specific stock,” said Petrescu, adding they had to read individual company reports. It’s more likely that hedge funds would want data on auto loan delinquencies and credit card debt, which is more of a signal that the consumer may be in trouble, he said.

Risks on the Horizon

According to a live poll on the webinar, geopolitical risks and market risks tied as the top risks selected by 19% of attendees, while 17% cited the economic impact of recession as the main concern. This was closely followed by misinformation/data risk and cybercrime at 14%. Both regulatory risk at 5% and climate risk/greenwashing at 7%, scored lower. Meanwhile, 21% of attendees checked “all of the above.”

On the webinar, Petrescu said he’s keeping an eye on three macro-themes, starting with corporate loan defaults. “We took for granted in a low interest-rate environment, when rates were 3%,” he said. “Now with rates at 6%, it’s difficult for companies to pay these higher rates, as well as rollover debt at the same rate.”

Energy policy is a second theme to watch, said Petrescu, noting that the US strategic petroleum reserve is down 40%. “I think that will be a big theme in this year especially for volatility in the prices of oil and other commodities,” said the data strategy as a service consultant, who previously worked at WorldQuant and ExodusPoint, and currently focuses on data strategy as a service.

A third macro-theme he’s tracking is around security of the global food supply. “We’ve seen the price of meat or a dozen eggs sometimes double or triple. People lose site that from a global perspective, Ukraine is a top 10 producer in items like corn, wheat, sunflower, and barley.” said Petrescu.

Turning to Alternative Data

Peter Hafez, chief data scientist at RavenPack, urged firms need to look beyond traditional data sets such as earnings data to fill in the gaps.

“It’s important to look at data sets that can give you both the necessary coverage on a global scale since we are dealing with geopolitical issues and also looking at data sets that are fast, said Hafez, adding this also points towards alternative data. As a company, RavenPack, a specialist in natural language processing, applies NLP to turn unstructured data, primarily news, into structured data.

“If someone is tracking inflation, they can look at news, but also collect data on prices, and read social media posts to find out what people think about inflation – whether it’s easing or accelerating.” Hafez urged financial firms to look at bigger data sets and to go faster.

Virginie O’Shea, founder and CEO of Firebrand Research, who moderated the panel, said that latency is a factor but noted, “that’s quite a lot of data” to manage.

Corporate Events Data

In addition, RavenPack’s Hafez said that looking at whether corporates are either delaying or advancing their earnings statements “has become an extremely powerful signal especially when looking at midterm horizons of one, two or three months.” Last November, TMX Group, operator of the Toronto Stock Exchange, acquired WSH, a provider of market-moving corporate events data.

Petrescu said corporate events data is valuable for knowing what’s happening in dividend declarations, government contract wins, or when credit facilities are expiring, which could be an indicator of corporate loan defaults. “Whether a firm has 3,000 stocks or 30 stocks in its portfolio,” Petrescu said, funds need to know what’s happening in their portfolio companies. An events calendar for the next three months provides information such as the date of their investor day or when their clinical trial data is being considered by the FDA, he said. “There’s very simple light-weight data feeds, and to not have one, fundamental or quant, you really have no excuse anymore.”

Acquiring Macro-Data Sets

Panelists advised funds to acquire a variety of data sets to “triangulate” their assumptions about revenues.

For consumer and technology companies, on the revenue-producing side, hedge funds and analysts rely on data from credit card receipts, email receipts, business-business transactions and apps such Apptopia that will report how many subscribers cancel Netflix, said Petrescu.

On the non-revenue producing side, firms will need to acquire other data sources, like increased raw supply costs, or employment costs, or regulatory costs or balance sheet items with loan defaulting, he said, “That will be a driver for this year,” said the data consultant.

With the current focus on macro risks, Mehta of Delta Capital predicts there will be “more focus on operating leverage across investors in this environment, as well as operating quality, as investors are likely to see margin compression and wages remain high.”

Amid uncertainty over potential rate hikes, TMX Group’s Clark said investment firms should look for any signs that credit markets are stressed or that markets are freezing up. Clark noted a few months ago, Bloomberg reported that Libor had reached a level not seen since 2008. In the current environment, “data-wise, investors would be looking for any signs of “widening out of spreads, or freezing out of products to make sure markets are free and flowing without liquidity stress,” he said.

Integrating Data into Workflows

The question is how are firms capturing these data feeds into their internal operations? Hedge funds could go to six different web sites to pull data on inflation and employment or trading information from the CFTC’s web site, said Petrescu. Hedge funds can obtain this type of data from firms like Macrobond, which aggregates thousands of feeds, said the data consultant. In terms of ingesting this data into their own operations, they can consume this data from a web site, a graphical user interface or pull data into an inflation model in Excel. Firms can pull in data through an application programming interface (API), or get a file from an FTP site, and take that file and bring it into their database internally. “Large hedge funds may have armies of people managing data, while others have two people in a garage, and there is no one way to approach this issue,” said Petrescu.

Increasingly hedge funds are taking advantage of technology advances in APIs to integrate data feeds into their front-office trading systems. “Managers are looking to integrate data and systems tightly across the board,” observed Jose Cortez, VP of Buy-Side Sales at FlexTrade. Cortez said he expects hedge funds to work with OMS vendors that support extensive API capabilities to unlock workflow integration between complex data sets and the investment and trading process. Cortez also expects more data vendors to leverage APIs to integrate with OMSs. “These alternative data sets will grow exponentially, and being able to integrate that data via APIs will require a robust API framework on how to handle that amount of data,” said Cortez.

Going forward, hedge funds and asset managers are expected to acquire additional data sets. Petrescu said that given the importance of the underlying macro theme, more funds will be looking for basic macro data, or other ways to predict the health of the consumer. “It’s important for these firms to continue build out larger data pipelines,” he said.