Friday, August 11, 2017

"Hedge Funds Look For An Advantage On the Dark Web"

From FinancialNews:
In the race for new data to better inform investment decisions, hedge funds have scraped Twitter, logged Amazon reviews, and monitored satellite images of oil tankers. Now they are turning to a more controversial resource: the dark web.

Access to the dark web is one service being offered by business intelligence experts to hedge funds, according to a number of people familiar with the providers. These experts specialise in doing deep dives into businesses and the people who run them.

Typically associated with drug and weapons sales and terrorism, the dark web is a series of websites accessed only through an encrypted network, which provides anonymity to its users. And it is these shady activities which make it so useful to the hedge fund industry, experts say.

“A hedge fund will come to us because they’re looking at investing in, say, an arms manufacturer headquartered in the Middle East,” said a former director of intelligence at a large corporate investigations firm who did not want to be named. “We’ll use the dark web to see if their products can be found for sale on there, if there’s any market for their products or counterfeits of them, and what sort of chat there is on there about these guys.”

Tracking companies on the dark web also works well for investigations into pharmaceutical businesses, he said, adding his team would find “massive, thriving markets” for counterfeit goods in possible target companies. “We’ll then warn the hedge fund there’s no point in buying this brand as there has been an erosion of value.”

It is more rare to find links between the target company and terrorism or money laundering on the dark web, although not impossible. “We’ll generally be asked [to look on the dark web] because we’re trying to prove a negative for the client,” the person said, explaining these mandates happen when the hedge fund is already suspicious about a target’s activities or value.

While accessing the dark web is not illegal in either the UK or US, using it as a resource in investment decision making marks a departure from the use of open source alternative data, such as social media and satellite images, which have exploded in use by hedge funds in the last few years.
Hedge funds are spending vast amounts to get information as their work is basically a bet on their information being better than others
Some in the investigations market say its use by hedge funds could be more difficult to justify to investors. “The dark web is not open data,” said an investigative researcher who said he had largely stopped working with hedge funds as the regulatory restrictions were too hard to navigate. He added that the anonymous nature of the dark web made it difficult for hedge funds to be sure they were not inadvertently accessing insider information or information that had been stolen from the company.

Another analyst said: “Hedge funds are spending vast amounts to get information as their work is basically a bet on their information being better than others. There are small investigators pushing the ethical and legal limits as close to the line as possible.”

But a former analyst at Kroll, a $1bn corporate investigations firm, waved away any suggestion that accessing the dark web as a corporate service presented an ethical challenge. “If you’re using it as a way to garner information and to warn people away from organisations then there’s nothing particularly dodgy about that,” he said. “The bigger qualms are making sure you’re [accessing the dark web] from a protected machine. If not, it’s a great way to get a virus.”

The adoption of the Market Abuse Directive by the European Commission in 2003, which tightened the rules around insider trading, hit relationships between corporate intelligence analysts and hedge funds hard.

“There used to be a very good business in doing investigations to see if companies were telling the truth or what their plans were,” said one business intelligence expert at a boutique firm. “The test was always can you find this out without it being clearly insider information? So you would go and talk to officials at a trade union about what you thought was happening, or you would go to a medical conference and gossip with doctors about how a drug trial was going....MUCH MORE