A growing alternative data company helps hedge funds determine if CEOs are lying using CIA interrogation techniques
- A software company called Amenity Analytics reviews earnings call transcripts, press releases, company research and more to try and help hedge funds spend less time looking for important nuggets of information and more time trading.
- The natural language processing software incorporates "publicly available" CIA interrogation techniques to find certain phrases and euphemisms that executives use to cloud the truth.
After a year of returns so poor that it prompted investors to redeem more than $33 billion, hedge fund managers are hungry for anything that gives them an edge on competitors and the market.
This has resulted in rapid expansion of alternative data providers, who mine for useful and actionable info in non-traditional ways.
One of these companies, Amenity Analytics, wants to cut the time analysts and portfolio managers spend poring over earning call transcripts by getting straight to the point: Some CEOs are not completely honest.
By using natural language-processing software to review companies' transcripts, press releases and public comments, Amenity assigns sentiments to key phrases and points. For example, the technology will identify words like "expanding" as positive while "limit" and "damage" are flagged as negative.
But the software goes a step beyond that as well, according to Amenity Analytics co-founder Nate Storch, who was a former portfolio manager at New York-based hedge fund Talpion Fund Management as well as an M&A banker at Morgan Stanley. The tool also picks out phrases and euphemisms executives use to couch bad news, something the firm calls its "deception score."
While the deception tracker does not give a numerical rating to the different phrases executives use, it does assign one of 10 descriptions to each deceptive "event." Examples include selective memory - "when an executive claims not to be able to remember information" - and negative cliches that "are overused and betray lack of original thought."
To train the software to detect deceptive language, Amenity built "publicly available" interrogation methods used by the CIA and others into the system, Storch said.
Read more: Nasdaq is buying a company that offers hedge funds obscure data to give them a trading edge
The goal of the technology is to read body language through written text.
"For us, it's really a spotlight for analysts to say 'this is where you need to be digging,'" said Amenity's marketing director Mark Zepf in an interview with Business Insider at the firm's Manhattan office.
With the average hedge fund down 4% last year and investors pushing portfolio managers to justify their fees, alternative data providers like Amenity have blossomed. According to AlternativeData.org, there are more than 400 providers providing datasets to 78% of the hedge fund industry. The industry group predicts in 2020 hedge fund managers will spend more than $1.7 billion on alternative data, up from $400 million in 2017.
Amenity has hired aggressively to match the increased interest, tripling its workforce from 20 employees at the beginning of 2018 to 60 employees now, split between offices in New York and Tel Aviv.
The company has attracted notable names in the software space, with Intel investing in the three-and-half-year-old company when Amenity was raising seed capital and holding a board seat. Nasdaq, Evercore and Barclays are clients that have posted research using Amenity's software.
Storch said his firm is not trying to replace widely used data providers like Bloomberg or Thomson Reuters, but instead amplify the information they provide.
"It's all the stuff that's not in your Bloomberg, he said. "It's an analyst for your analyst," he said.
Sign up here for our weekly newsletter "Wall Street Insider," a behind-the-scenes look at the stories dominating banking, business, and big deals.