HighStep Adds Connotate Data to Models

23 July 2008

Mamaroneck, NY-based start-up hedge fund HighStep Capital is incorporating market trends-identified from fundamental data sourced from the Internet using a series of software "agents" from New Brunswick, NJ-based vendor Connotate-into the firm's investment analysis and decision-making process.

HighStep first began using Connotate's software agents around nine months ago to monitor changes in information on Web sites that might indicate the financial health of a company, says the hedge fund's founder, Jason Jones. Since then, he has used the information to build sample datasets to attract funding for his long-short equity hedge fund, by showing prospective investors how trends based on data from the Internet can be used as an input into stock trading

Now, after compiling nine months' of data, Jones says he is beginning to incorporate those trends into his analysis of companies' stock price, as an input alongside traditional fundamental research and sell-side research models.

By creating a group of agents that monitor real-time changes to information on multiple Web sites-for example, for monitoring the prices of electronic products from competing companies-and aggregating the results, a user can create a real-time feed of prices or other information, Jones says.

That feed is loaded into a database hosted by Connotate, which provides a Web portal for Jones to view the data online or to download the information into spreadsheets "so I can crunch the numbers myself," he says.

Reacting Faster

Integrating that data with brokers' revenue estimate models should allow him to apply the same calculations in real-time, and to "react faster than the rest of the market because I'm getting real-time data, and everyone else might only be getting that data at the end of each financial quarter," Jones says.

Two examples of how the technology can be applied are in monitoring product prices and job vacancies. By monitoring the price of similar products on e-commerce Web sites, such as the Garmin and TomTom GPS navigation devices, it is possible to determine whether either is dropping prices and precipitating a price war-in which case he would avoid investing in their manufacturers.

Meanwhile, monitoring the job vacancies posted on a company's Web site each day can indicate company health. "Oftentimes, we see either a surge or decline in the number of jobs posted before a company makes a significant announcement," Jones says. "If we see a large drop in the number of jobs advertised, that is an indicator that there might be something negative coming up."

Jones says he is currently monitoring around 20 Web sites, but says that could expand as HighStep expands into trading companies in other sectors, such as travel, airlines, energy and commodities, where relevant data is also easily available online.

In some cases the agents are simple enough for Jones to set up himself, though in other cases Connotate's team bas built custom agents-for example, when targeting a completely new sector, or if a Web site's construction makes it difficult to extract data.

"The uses for our software are definitely growing. Jason is using a classic example, building fundamental trends. But as we go into our other buy-side customers, we see other cases emerge, such as using agents to monitor market-moving alerts, or monitoring for company news or press releases at a higher frequency than mainstream publishers would," says Matt Jacobson, vice president of client services at Connotate. "We have customers focused on sectors from pharmaceuticals... to construction equipment and energy," Jacobsen adds.

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