Hedge Fund Question of the Week – Winter Edition – No. 7

By Tom Hardin, Tipper X Advisors

What two recent developments merit heightened attention for insider trading?

Answer (Part 1): The first involves alternative data.

I have presented to over 150 hedge funds and financial regulators in seven countries over the past three years and possess a unique perspective on research culture. Based on my experience, the use of alternative data is one of two areas that deserve greater attention for insider trading risk.

Alternative data has become more accessible and more widely used, even compared to 2016 when I began sharing my story. At the same time, global regulators have offered limited guidance on how to deal with data providers.

In assessing the risk of any data vendor, a hedge fund firm should assume that the data is material. The focus then shifts to whether the data vendor has been properly authorized at every step of the collection and distribution process. In short, has the collection of the data been lawful and authorized and not distributed in breach of a duty of confidentiality.

Thereafter, a hedge fund firm must remain diligent in the ongoing oversight of data vendors. It may be the case that data is used by the firm in unexpected ways or that the vendor adds more data sets without informing the firm’s compliance team.