• Omega Advisors founder Leon Cooperman told attendees at an Alternative Investment Roundtable event in New York that now was not the time to invest in private equity.
• Cooperman, who is transitioning his hedge fund into a family office, said there were several headwinds for private equity, including an expectation for increased interest rates when many PE firms would need to sell out of their investments.
• That comes as some big hedge funds have been making more PE-like investments and the two industries battle each other for talent. 
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The latest move in the battle between hedge funds and private equity comes from a billionaire stock picker who represents the old guard of the hedge-fund industry.

The billionaire and Omega Advisors founder Leon Cooperman told attendees at an event in midtown Manhattan he thinks private equity, as it currently operates, is a "scam."

"They're getting very fancy fees for sitting on your money," Cooperman said at the Penn Club. PE firms have been raising massive funds and have amassed hundreds of billions of dollars in so-called dry powder that has yet to be deployed into investments.

Hedge-fund performance, meanwhile, has also been under scrutiny, thanks to the high fees that are typical of the space. Last year, the average hedge fund lost money, and the market has outpaced the average fund in 2019, according to Hedge Fund Research.

And the line between private equity and hedge funds has been getting more blurred. Some of Cooperman's hedge-fund brethren have been increasingly creeping into the private-equity space, with firms like Viking, Tiger Global, and Point72 investing in private markets and fighting PE firms for talent.

Large institutional investors, hedge funds' biggest clients, have also been pumping money into private equity, which has raised close to $432 billion in assets in 2018, with a large chunk of money that still hasn't been put to work. 

Cooperman, who made his money as a value investor in the public stock market, said he believes the market is "fully valued," making any deal expensive.

He noted that many deals being executed today have low interest rates for borrowing money — something he doesn't expect to be the case when private equity needs to sell out of their investments in seven to 10 years — and the fact the game is more crowded now. 

"It's no longer an undiscovered concept," he said. 

Read more: The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.

According to Cooperman, who is transitioning his hedge fund into a family office, private-equity returns have been "aided and abetted" by the low-interest-rate environment that has followed the housing crisis. Without rates this low, he said, private equity returns would not be the same.

Low interest rates have "made the exit multiple much higher than the entrance multiple," he said, especially for large deals.

When a member of the audience, who said they worked at a private-equity firm, pushed back on Cooperman's outlook, he said that some smaller deals could still make sense, but the current projection for interest rates does not make large-scale deals a good bet. Many of those big deals, he said, ultimately enrich executives at the firm.

"I think leveraged buyouts to a degree are a giant case of insider trading," he said, referencing examples of public companies that then become private. 

Read more: We talked to 7 insiders about the $27 billion Refinitiv-LSE deal. Here's how one of the biggest data deals of the year came together.

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• Prominent investors like Michael Burry have been voicing concerns about passively managed index funds. Burry recently warned passive investing has become a bubble. 
• The billionaire hedge-fund founder Leon Cooperman said what "scares the hell" out of him is the lack of "stabilizers" in the market. He said the Volcker rule and rise of momentum and high-frequency traders have changed the market structure.
• "The market is not the market we grew up with," Cooperman said. 
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The famed investor Michael Burry recently sounded the alarm on passively managed index funds. The billionaire Leon Cooperman said he wasn't quite as negative when it comes to passive investing but warned that the market has still changed in a fundamental way. 

Passive investments now control more of the $8 trillion stock-fund market than their actively managed counterparts, and Cooperman, the founder of Omega Advisors, told attendees at an event in midtown Manhattan on Wednesday that the lack of what he called "stabilizers" in the market was concerning. 

"One of the biggest problems we are all facing now — and it scares the hell out of me — is market structure. The market structure is totally different than anything we were brought up with in the past," he said.

Read more: D.E. Shaw is going to trial over the sale of a litigation finance portfolio company, shining a light on a side-pocket deal at the secretive hedge fund firm

The Volcker rule, Cooperman said, eliminated big Wall Street banks' brokerage commissions, so now Goldman Sachs and others "won't make bids anymore." Those bids used to act as a cushion and could slow down high-frequency traders, he said. 

"There's no stabilizer left in the market," he added.

More business going to specialist exchanges outside the traditional New York Stock Exchange also adds risk, he said.

"The collapse in the stock market in the fourth quarter had nothing to do with economic fundamentals. It was a loss of liquidity in the market, hedge-fund liquidation, and tax-loss settlement," he said.

"The market is not the market we grew up with," he added. 

Read more: Mutual funds like Fidelity's famed Contrafund have slashed valuations on their WeWork stakes

Burry — who was profiled in the Michael Lewis book "The Big Short," and portrayed in its subsequent movie adaptation, for his correct bet that the housing market would crash — recently said passively managed mutual funds and exchange-traded funds are a "bubble" similar to the subprime-mortgage market in 2007.

Cooperman said he was not as extreme on his view of passive, which he said was somewhat like automation coming to the investment industry. One of the big issues with passive investing is that "a lot of people are going into the index with no idea of what they're buying," he said. 

"A bear market will occur very, very quickly" when it starts because of the amount of money tied to the relative performance of the market, he said. 

Read more: Meet the 8 people with new ideas about data, fees, and tech who are shaking up the $3.2 trillion hedge fund game

Thirty years ago, funds run by active stock pickers — who were consciously choosing which securities to invest in — had nearly eight times the assets as passively run peers.

But the long-running bull market and low fees offered by the index-fund providers Vanguard, BlackRock, Charles Schwab, and State Street, have finally pushed passive assets above active for the first time ever, according to the data company Morningstar. 

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• Millennium has added a Paris-based quant team led by former Societe General prop desk head Maxime Kahn. 
• Kahn and his team were previously running $300 million of BlueCrest Capital founder Michael Platt's money at Kahn's short-lived hedge fund, 111 Capital.
• Quant talent has been hard to come by, as hedge funds have battled Silicon Valley for the best people.
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Izzy Englander's Millennium has added a team of quants in Paris that were running hundreds of millions of Michael Platt's money, sources tell Business Insider.

Maxime Kahn and his team of quants joined Izzy Englander's fund roughly two years after starting 111 Capital.

Kahn, the former head of the prop desk at Societe Generale, was given $300 million by BlueCrest Capital founder and billionaire Platt in 2017 to start 111 Capital after more than 21 years at the French bank. Kahn's firm was only allowed to run Platt's money for the first 18 months, according to media reports at the time.

Millennium declined to comment, while Kahn and Platt were not able to reached for comment. 

Millennium, which notched returns of 5.61% through the end of July, has in the last couple years added big names like former Hutchin Hill founder Neil Chriss and former Nomura and Barclays quant trader Derrick Li to its quant roster.

See more: Balyasny's quant head is out as the $6 billion hedge fund undergoes a strategy revamp

Quants have been some of the most sought-after talent in the hedge fund game, with managers battling not just one another but big-name Silicon Valley companies for talent.

The decision for Kahn and his team to join a larger fund is discouraging news for hopeful hedge fund founders, who have found the appetite for new launches lacking.

Other small funds, like Samantha Greenberg's Margate Capital and Mark Fishman's Aesir Capital, have decided to close shop and join bigger managers — Citadel for Greenberg and ExodusPoint for Fishman — this year instead of operating without the scale and resources Millennium, Citadel, Exodus, and others can offer.

See more: From an army of traders in Long Island to quants around the world: What's coming next for hedge-fund powerhouse Schonfeld Strategic Advisors

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• Institutional investors are cautious about risks to the global economy and are simultaneously reluctant to make any major contrarian bets in the stock market.
• Their uncertainty stems largely from the trade war and has left them feeling trapped, according to money managers who spoke with Business Insider.
• Hedge funds' exposure to stocks is near its lowest level since the financial crisis, and investor sentiment is weak, according to data compiled by JPMorgan.
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Warren Buffett is credited with saying"be fearful when others are greedy, and greedy when others are fearful."

These words of wisdom helped the Berkshire Hathaway chairman earn his stripes as the most legendary investor of his generation.

But these days, institutional investors in stocks are struggling to apply his principle. They are confronted with an investing landscape that contains sufficient risks to be fearful of but lacks the bullish pointers that would warrant a contrarian posture.

"Institutional investors are cautious, but they kind of feel like they're stuck," said Lori Heinel, the deputy chief investment officer of State Street Global Advisors, which manages nearly $2.9 trillion in assets.

"They can't just get out of equities because they need the returns," she told Business Insider in a recent interview. "They're afraid of missing out because this market has been so choppy and surprisingly resilient. But they're also looking at hedges, buffers, and other ways to truncate some of the tail risk."

These comments check out when one looks at the data on large investors' holdings.

In a recent note to clients, Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, shared the following two charts to show that investors' views on stocks had become strained.

First, hedge funds' exposure to equities is near its lowest level since the financial crisis.

In addition, investor sentiment as measured by the AAII bull-bear indicator has deteriorated to levels seen during the 2008 financial crisis and the market meltdowns in 2015 and 2018.

"As the US-China trade war destabilizes the global economy," Kolanovic said, and President Donald Trump's tweets "continue destabilizing financial markets, many managers find it difficult to be invested in equity markets."

He added: "The uncertainty brought about by the trade war has erased confidence built over a decade in the equity markets, in our view, both with more sophisticated investors (hedge funds) and individual investors alike."

Read more: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

The bottom line is that many investors aren't seizing this deadlock as a contrarian buying opportunity.

This might be such an occasion, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch. He said in a recent note that the firm's bull-and-bear indicator flashed a contrarian "buy" signal for the first time since January.

But his observation came with a warning on what the flipside could look like. Investors' recession fears triggered an exodus from stocks and a record $160 billion flow into bond funds that inflated the asset class. A disorderly exit from bonds could trigger a spike in interest rates and, consequently, a recession, according to Hartnett.

The 'most complex' time to invest

He laid out one specific scenario of how the downside risks might unfold across markets. Meanwhile, investors have their eyes on a broader factor at play: This business cycle appears to be in its twilight period.

"The late cycle is the most complex and challenging period of the market cycle and of the economic cycle," said Erik Knutzen, the multi-asset-class chief investment officer at Neuberger Berman, a $333 billion manager.

"That's what investors are reacting to," he told Business Insider. "I think they are, quite potentially, paralyzed at this point."

Knutzen's advice for responding to this predicament is to consider parts of the world with economic cycles that aren't as mature as the US's and nascent themes like 5G technology and autonomous driving.

The Vanguard FTSE Emerging Market exchange-traded fund, the iShares Self-Driving EV and Tech ETF, and the Defiance Next Gen Connectivity ETF are three ways to invest in these recommendations.

SEE ALSO: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners. Akin Oyedele 2h

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• A massive shift in the stock market from top-performing growth stocks to lower performing names triggered a sharp shift in "momentum," and is crushing hedge funds this week. 
• "This has been a brutal move," said a person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."
• "The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months," a Morgan Stanley memo to clients said.
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A massive shift in the stock market from top-performing growth stocks to lower performing names triggered a sharp shift in "momentum," and is crushing hedge funds this week. 

Goldman Sachs said in a note that the decline "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, seen by Business Insider, trying to explain the moves and saying the pain could well keep going. 

"Everything that worked all year got sacked and whacked," one quant hedge fund source told Business Insider.

"This has been a brutal move," said another person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."

A Morgan Stanley sales desk sent a memo on Wednesday, outlining its traders' take on "the magnitude and velocity of this week's rotation."

Read more: The stock market is experiencing a jarring shift seen only twice in history, and not since the tech bubble. Here's where JPMorgan's quant guru says investors should look to capitalize.

"All strategies are down," Morgan Stanley said, warning that if the momentum "morphs" from short sellers covering to a wider selloff by longer term stock holders, "this is likely to spill over to the overall market." 

"If contained to a positioning unwind, the pressure should abate in a week or two," the bank said. "But to be clear, the risks skew towards more derisking relative to historical unwinds, not less. The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months."

"The longs are in the largest sectors of the market," including tech and healthcare, "and underperformance there can bring a broader array of sellers." 

What caused this big shift? 

"There was no single hard catalyst," Morgan Stanley said. "The proximate causes were modest improvements in macro data" such as ADP's US payrolls data, non-manufacturing activity, and the Citi Economic Surprise Index, as well as increased optimism about the US-China trade war and recent upticks in the 10-year Treasury yield.

"But it was really heightened risk aversion that caused the moves — investors were becoming increasingly nervous about P/L after underperformance from crowded areas," such as software stocks as well as what it said was the underperformance of short sellers in the week after Labor Day. "A lot of investors trying to protect P/L and de-risk at the same time led to gaps that then accelerated and fed on themselves."

Read More: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

The event brought up bad memories of the "quant quake" of 2007, driven by crowded trades that ended up thrashing giants like Renaissance Technologies. But the quant hedge fund source said that losses this time around were "not close to" those during the quake a decade ago. 

Still, the memo detailed some scenarios that could exacerbate the problem.

Morgan Stanley said selling among long investors could happen if:  

• • "There is a decline in P/L that forces further degrossing (i.e. this just gets worse to the point hedge funds need to sell longs).
  • There is a negative fundamental shock, investors realize that their longs in Growth and Tech are more cyclical than they expected, and they are forced to sell those holdings."

Also ominous: Morgan Stanley's CFO, at a Barclays conference on Wednesday, said that equities trading has been slow in the third quarter. The firm had originally said the third quarter was looking strong on trading. 

A Morgan Stanley spokesman said the bank couldn't immediately comment on the memo. 

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• You might have missed it, but there's been some remarkable shifts in the stock market over the past few days.
• In particular, there's been a shift from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 
• A number of hedge funds had bet big on momentum, and the shift has left many nursing significant losses, according to sources.
• Visit Business Insider's homepage for more stories.

To casual observers, the stock market has traded in a relatively benign fashion over the past few days.

But some remarkable shifts that took place underneath the surface caught the attention of strategists, and are inflicting severe pain on a number of hedge funds. 

In short, there's been a massive rotation away from the best-performing stocks and into those that had been neglected. That is known as a rotation from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 

Goldman Sachs said in a note that the decline on momentum "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, seen by Business Insider, trying to explain the moves and saying the pain could well keep going.

Here's what you need to know:

• The sudden and decisive rotation exposes how vulnerable investors have become to swings of this nature, according to Peter Oppenheimer, the chief global equity strategy at Goldman Sachs. In a recent note to clients, he said the rotation would most likely be short-lived and explained how to align with the longer-term winners. 
• Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, identified a pattern within the shift that has happened only twice before. Specifically, last week JPMorgan's momentum indicator of small-cap stocks reached its maximal negative reading, while the same indicator for large companies on the S&P 500 reached its maximal positive reading. A divergence of this magnitude has occurred only twice before, according to Kolanovic: in February 1999 and during the tech bubble. He said the move into value stocks was likely to continue and advised investors on how to be positioned so they can capture the strongest upside going forward.
• Hedge funds have been feeling pain as a result of the shift. "Everything that worked all year got sacked and whacked," one quant hedge fund source told Business Insider. "This has been a brutal move," said another person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."
• A Morgan Stanley sales desk sent a memo on Wednesday, outlining its traders' take on "the magnitude and velocity of this week's rotation." The note said that "all strategies are down," and warned that if the momentum "morphs" from short sellers covering to a wider selloff by longer term stock holders, "this is likely to spill over to the overall market."

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• Big name hedge funds have revealed their holdings of Uber for the first time since the companies massive IPO. 
• Lyft, meanwhile, saw many managers trim their stakes in the second quarter, filings show. 
• Both stocks have sank considerably during their brief time on public exchanges. 
• Visit Business Insider's homepage for more stories.

Some of the world's largest hedge funds sold shares of Lyft during the second quarter, as many money managers disclosed massive stakes in its competitor Uber for the first time. 

Hedge funds and other large investors are required to disclose their stakes in public companies four times a year, following the close of each quarter. Because Lyft went public at the very end of the first quarter, its likely that the funds interested in the stock bought in then, and already disclosed the holdings in April. 

Uber, by contrast, went public in May, so the disclosed holdings may not necessarily represent new buys and could be largely made up of stakes bought while the company was still private. 

Still, no positions in Lyft were drastically increased in the second quarter by big-league managers while Uber saw plenty of activity.

Viking Global Investors, a Connecticut-based fund with roughly $34 billion in assets under management, was one of the largest buyers in the quarter. The fund bought 13.37 million shares of Uber worth about $620 million, according to regulatory filings. It owns no shares of Lyft.

Read more:Uber's top lawyer reveals how the CEO convinced him to join the company he'd previously said he would avoid

Citadel Advisers, the $30 billion Chicago-based fund managed by Ken Griffin, also bought 7.08 million shares of Uber, worth $215.7 million at today's prices, according to regulatory filings. The fund also owns about 3.2 million shares of Lyft, worth roughly $171 million at Thursday's prices.

Tiger Global Management got in too. The Julian Robertson founded fund snapped up 6.6 million shares of Uber worth $309 million in the second quarter, filings show.

Other funds bought up plenty of smaller stakes. Stanley Druckenmiller's Duquense Family Office bought 2.69 million shares of Uber, worth $124.8 million, its filings show, while D.E. Shaw bought 512,587 shares of Uber worth $17.3 million at today's prices, according to its Form 13F filed Wednesday. The fund also owns 1.7 million shares of Lyft, worth about $90 million.

Lyft, however, saw many funds trim their positions as the stock fell about 30% from its initial trading prices.

Eminence Capital, a smaller fund with roughly $8 billion under management, meanwhile, exited its Lyft position, selling 830,000 shares — worth $in the second quarter. Overall, 138 funds closed or reduced their Lyft positions in the quarter, while 193 added to or created new stakes in the company, According to Whale Wisdom.

In total, hedge funds trimmed their shares of Lyft by about 11%.

More ride-hailing news: 

• Uber's top lawyer reveals how the CEO convinced him to join the company he'd previously said he would avoid
• Uber spent over $200,000 on balloons — now its CEO is getting rid of them to cut costs as nervous engineers worry about layoffs

SEE ALSO: An early Uber investor says the company's new leaders have 'lost their mojo' — but can still beat Lyft in the long run

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• The hedge fund game is dominated by big players, and it can be tough for true innovators to carve out a niche. Here are eight people making their mark with new twists on fees, data, ESG investing, and more.
• Investors have questioned the hedge fund industry's high fees and recent lackluster performance — which has helped make the case for new ideas more compelling. 
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The hedge fund industry is often slow to embrace change.

Sure, funds start and close every year, and managers tweak investment strategies and fee structures, but many have been sticking to the same basic approaches for decades. 

We found eight people who are actively trying to change things up when it comes to data, fees, sustainable investments and more.

They work at places like JPMorgan, APG Asset Management, and Acadian Asset Management, among others. Some have been at their mission for years while others are just starting out, but all of them are doing something that turns conventional thinking in the hedge fund space on its head. 

Jim Carney, CEO of Parplus Partners

One of the defining traits of hedge funds is their high fees. 

While the industry has been moving away from the once-common 2% management fee and 20% performance fee, hedge funds still stand out at a time when fees on retail investor-geared products are in a race to the bottom. 

Parplus Partners, a New York-based volatility trading hedge fund, has come up with a different model. Jim Carney's fund trades volatility options and holds cheap S&P 500 index funds, and collects performance fees of 33% only if it outperforms the market.

"I wanted to have our interests aligned with investors," Carney told Business Insider. Carney launched Parplus in 2017 with seed capital from his former employer Ronin Capital, and has made a name for his fund thanks to the fee structure. 

After starting with just $13 million, Parplus has more than $120 million in assets now, and the fund finished 2018 up 78%, according to a factsheet. 

Management fees, Carney says, encourage funds to go out and raise a lot of money instead of focusing on actually managing it. 

"We want to use investor money in the most efficient way," he said. 

Parplus currently runs one fund, which trades options on the stock market's volatility, but is planning to roll out a fixed-income fund as well, which will have similar performance hurdles. 

Basil Qunibi, CEO of Atom Investors

Turning a data company into a hedge fund isn't always easy. 

Financial Risk Management and CargoMetrics Technologies have had success transforming into hedge funds. 

But there's also the case of Incapture Technologies — backed by former Barclays CEO Bob Diamond — which flamed out after a year amid investor worries about Incapture selling its proprietary technology to competitors.

But Atom Investors is different, mainly because its founder Basil Qunibi, who also started data company Novus, has always wanted to be in the hedge fund game. 

Hearing Paul Tudor Jones and John Griffin speak at his alma mater, University of Virginia, helped fuel Qunibi's interest in the industry, he has said, but after a stint at Merrill Lynch he didn't find many funds that would hire him. 

"I interviewed at a lot of hedge funds, I didn't get a lot of offers," he said on Ted Seides' Capital Allocators podcast last year.

Qunibi instead made his way into the industry from the investor side, working for a fund-of-funds that used to be a part of BNY Mellon, which was where he started developing the basis for Atom. 

Novus was created "a little bit out of frustration," Qunibi said on the podcast, because he noticed that investors were not doing deep analysis when picking hedge funds.

"It was a big surprise to me to see that fundamental analysis not incorporated into the selection of investment managers," he said. 

Qunibi said on the podcast that Novus' big value to allocator clients is helping them understand underlying skillsets of managers.

Austin, Texas-based Atom now uses analytics from Novus to evaluate portfolios and make allocations to hedge funds, and is running more than $1 billion after launching last year. 

Atom started by investing in 20 hedge fund managers through separately managed accounts, and according to a media report, pledged $200 million to short-selling start-up fund Orso Partners this summer. 

Jamie Kramer, head of alternatives solutions group at JPMorgan

Hedge funds have been looking more at ESG ratings when evaluating investments. And now, thanks to one person, they're also paying attention to how their own business stacks up. 

"When we first started asking 'Does the manager have an ESG policy?' we got people saying 'Do we have a what?'" said Jamie Kramer, head of JPMorgan's alternative solutions platform. 

JPMorgan's platform works with roughly 100 hedge funds that clients can use to build portfolios, and it started tracking ESG metrics on the managers in early 2018. 

At the time, only four hedge funds on the platform had a formal ESG plan for their own businesses, Kramer said. 

Now, with the help of Kramer and her team, roughly half of the managers do, and JPMorgan hopes that will hit 75% in the next year.

To Kramer, it's a no-brainer for hedge funds, which are already tracking every other type of performance metric.

"It's being aware of what of the nonfinancial will eventually drive financials," she said.

"Once you measure something, people are going to pay attention to it," she added. 

JPMorgan last year also began tracking diversity at hedge fund managers when evaluating whether they should be added to the platform, running the stats to see which ones had a significant owner or prominent investor that is a person of color or a woman.

Of the invested capital in the funds on the JPMorgan platform, 38% is with women- and minority-led managers, and a quarter of the managers are women- or minority-led.

In contrast, women and minority-owned hedge funds control less than 1% of industry AUM and represent only 13.5% of firms, according to the Knight Foundation.

Michael Weinberg, head of hedge funds and alternative alpha at APG

In the hedge fund world, artificial intelligence and machine-learning are talked about more than they are actually used.

Funds that rely solely on those technologies to trade represent only a fraction of the industry's assets, and investors often have a hard time understanding the strategies.

But Michael Weinberg is not all talk — he's making investments in funds that are actually using the tech and has been one of the biggest drivers of bringing AI to the hedge fund game. 

Weinberg, head of hedge funds and alternative alpha at APG Asset Management, was a research contributor on the World Economic Forum's paper on AI, which described it as a key part of a "fourth industrial revolution." He also helped found the Artificial Intelligence Finance Institute, where he is now on the advisory board. 

Weinberg, the former CIO for the late Jeffrey Tarrant's Protege Partners and MOV 37, believes that the application of AI to finance and hedge funds is still in the first inning, but will rapidly grow once more people become comfortable with it. The most recent wave of investors using these techniques are more willing to share their processes, he said.

"Smaller and emerging managers are often quite transparent with non-disclosure or confidentiality agreements because they have to be if they are to attract investors, raise assets and grow their funds and businesses," he said. 

These funds will be able to look at "5,000 stocks constantly, with 10,000 data points for each company," he said. 

"They're doing it faster, cheaper, and more efficiently,"he said, and it will only be a matter of time until they are as common as the algorithmic trading funds that currently dominate the market. 

Clay Gardner, co-founder of Titan

Titan co-founder Clay Gardner wants even the smallest investors to be able to trade like a big hedge fund.

Gardner, Joe Percoco and Max Bernardy had all worked at hedge funds on either the operations or investment side before launching Titan in 2018.  The company offers robo advisor-esque, 20-stock portfolios based on public filings of top hedge fund's holdings. 

"It was sort of an aspirational concept," Gardner told Business Insider.

"Everyone can invest like one of these titans." 

Titan Invest has a minimum investment of only $500, and has attracted $30 million in AUM from roughly 6,000 users, Gardner said. 

Gardner worked for Tom Steyer's Farallon and the Blackstone-backed Carbonado Capital as an analyst and investor.

"For the types of funds we worked at, the filings were really a fantastic look into a portfolio," Gardner said.

"You could replicate that without the high cost," he said.

See more: Lone Pine Capital stock-pickers explain why they're investing in Tiffany and Nintendo and how they value 'disruptors' like Beyond Meat

The goal for the team is to eventually replicate all of the complex hedge fund strategies for the average investor, a dream that Gardner admits will be complicated compared to scraping 13-F filings. 

"Fast forward 10 years, and we want our retail investors to be able to invest across all asset classes."

Carson Block, CEO of Muddy Waters Research

Muddy Waters Research founder and short-seller Carson Block has been known for calling out companies as frauds — but recently he's also been going after the hedge funds and banks that invest in the names in his crosshairs.

He has become one of the loudest voices within finance about "amoral investing," and told a conference room full of his peers last December that short-sellers "should put the world on notice." 

"The question I ask is: Should this business be running the way it is? Should it exist the way that it does, regardless of the way it generates money?" Block said at the conference.

"If the answer is no, then get the f--- out."

He targeted healthcare companies in particular, and said investors should start naming not only the executives of "scummy businesses" but the portfolio managers and analysts who continue to buy and support the companies. 

Short-sellers have, in the past, claimed moral high ground, saying they are protecting the market from frauds, and Block has taken it a step further with his call to morality. He has also helped one-time congressional candidate Dan David start his own due diligence firm after David gained prominence for exposing several fraudulent Chinese companies. 

See more: Activist short seller Carson Block is taking aim at 'amoral' investing practices and says it's time to 'name names'

Tim Harrington, founder of BattleFin

Tim Harrington has made alternative data so popular that his annual BattleFin conference in New York had to find a new venue after outgrowing an aircraft carrier.

Harrington, who previously worked for Steve Cohen's SAC Capital and JPMorgan, is a co-founder of BattleFin, which has become a one-stop shop for all things alternative data. 

His New York conference, where hedge funds can meet with people selling unique data sets pulled from things like satellite images and web traffic, now fills up multiple ballrooms at Plaza Hotel. 

See more: Hedge-fund managers are overwhelmed by data, and they're turning to an unlikely source: random people on the internet

The company has also rolled out Ensemble, where people looking to buy data can get a marketplace of pre-vetted sellers of everything from credit card receipts to social media trends to weather projections. 

And data provider Refinitiv invested in BattleFin in June— since then, a $27 billion deal has been announced for the London Stock Exchange to buy Refinitiv. 

As hedge funds and corporations continue to plow money into alternative data, Harrington has built an organization and platform for it to be put to use. While the field is quickly becoming the new norm, odds are new users will need a guide to sort through it all.

See more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.

Ilya Figelman, head of multi-asset group at Acadian Asset Management

One of the biggest mistakes a hedge fund or asset manager can make is expanding into something they don't know.

Fixed-income giant PIMCO has struggled to find its niche in equities, while Andrew Feldstein's credit-focused hedge fund BlueMountain has cut two equities strategies within a year — and its majority stakeholder AMG just sold to Assured Guaranty. 

But quant firm Acadian Asset Management managed to stick to its roots while still making a jump into the multi-asset space, and brought its already successful computer-driven strategy to the arena of some of the most well-known security pickers. 

Ilya Figelman, who joined Boston-based Acadian three years ago to lead the effort, said he has recruited experts on a wide range of market topics to act as the final read for the algorithm's decisions.

They use over 200 factors to forecast prices for more than 100 potential assets across equities, bonds, currencies, commodities, and options — their way of quantifying the global macro strategies that funds like Tudor and Elliot made famous.

"We are not a black-box either," Figelman said. "We can explain this strategy and this process to investors." 

The 16-person team is only running $30 million in seed capital from Acadian right now, but has been generating interest among investors after making money during last year's fourth quarter, Figelman said. 

• A massive shift in the stock market from top-performing growth stocks to lower-performing names triggered a sharp shift in "momentum" and has crushed hedge funds this week. 
• "This has been a brutal move," a person at a hedge fund in London said. "Huge move and lots of pain. It was like a four-standard-deviation day followed by another four-standard-deviation day. That's unheard of."
• "The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months," a Morgan Stanley memo to clients said.
• Click here for more BI Prime stories.

A massive shift in the stock market from top-performing growth stocks to lower-performing names triggered a sharp shift in "momentum" and has crushed hedge funds this week. 

Goldman Sachs said in a note that the decline "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, which was seen by Business Insider, trying to explain the moves and saying the pain could well keep going. 

"Everything that worked all year got sacked and whacked," one quant-hedge-fund source told Business Insider.

"This has been a brutal move," another person at a hedge fund in London said. "Huge move and lots of pain. It was like a four-standard-deviation day followed by another four-standard-deviation day. That's unheard of."

A Morgan Stanley sales desk sent a memo on Wednesday outlining its traders' take on "the magnitude and velocity of this week's rotation."

Read more: The stock market is experiencing a jarring shift seen only twice in history, and not since the tech bubble. Here's where JPMorgan's quant guru says investors should look to capitalize.

"All strategies are down," Morgan Stanley said, adding that if the momentum "morphs" from short sellers covering a wider sell-off by longer-term stock holders, "this is likely to spill over to the overall market." 

"If contained to a positioning unwind, the pressure should abate in a week or two," the bank said. "But to be clear, the risks skew towards more derisking relative to historical unwinds, not less. The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months."

"The longs are in the largest sectors of the market," including tech and healthcare, "and underperformance there can bring a broader array of sellers." 

What caused this big shift? 

"There was no single hard catalyst," Morgan Stanley said. "The proximate causes were modest improvements in macro data," such as ADP's US payrolls data, nonmanufacturing activity, and the Citi Economic Surprise Index, as well as increased optimism about the US-China trade war and recent upticks in the 10-year Treasury yield.

"But it was really heightened risk aversion that caused the moves — investors were becoming increasingly nervous about P/L after underperformance from crowded areas," such as software stocks, as well as what it said was the underperformance of short sellers in the week after Labor Day. "A lot of investors trying to protect P/L and de-risk at the same time led to gaps that then accelerated and fed on themselves."

Read More: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

The event brought up bad memories of the "quant quake" of 2007, driven by crowded trades that ended up thrashing giants like Renaissance Technologies. But the quant-hedge-fund source said that losses this time around were "not close to" those during the quake a decade ago. 

Still, the memo detailed some scenarios that could exacerbate the problem.

Morgan Stanley said selling among long investors could happen if:  

• • "There is a decline in P/L that forces further degrossing (i.e. this just gets worse to the point hedge funds need to sell longs).
  • "There is a negative fundamental shock, investors realize that their longs in Growth and Tech are more cyclical than they expected, and they are forced to sell those holdings."

Also ominous: Morgan Stanley's CFO said at a Barclays conference on Wednesday that equities trading has been slow in the third quarter. The firm had originally said the third quarter was looking strong on trading. 

A Morgan Stanley spokesman said the bank couldn't immediately comment on the memo. 

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• You might have missed it, but there's been some remarkable shifts in the stock market over the past few days.
• In particular, there's been a shift from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 
• A number of hedge funds had bet big on momentum, and the shift has left many nursing significant losses, according to sources.
• Visit Business Insider's homepage for more stories.

To casual observers, the stock market has traded in a relatively benign fashion over the past few days.

But some remarkable shifts that took place underneath the surface caught the attention of strategists, and are inflicting severe pain on a number of hedge funds. 

In short, there's been a massive rotation away from the best-performing stocks and into those that had been neglected. That is known as a rotation from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 

Goldman Sachs said in a note that the decline on momentum "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, seen by Business Insider, trying to explain the moves and saying the pain could well keep going.

Here's what you need to know:

• The sudden and decisive rotation exposes how vulnerable investors have become to swings of this nature, according to Peter Oppenheimer, the chief global equity strategy at Goldman Sachs. In a recent note to clients, he said the rotation would most likely be short-lived and explained how to align with the longer-term winners. 
• Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, identified a pattern within the shift that has happened only twice before. Specifically, last week JPMorgan's momentum indicator of small-cap stocks reached its maximal negative reading, while the same indicator for large companies on the S&P 500 reached its maximal positive reading. A divergence of this magnitude has occurred only twice before, according to Kolanovic: in February 1999 and during the tech bubble. He said the move into value stocks was likely to continue and advised investors on how to be positioned so they can capture the strongest upside going forward.
• Hedge funds have been feeling pain as a result of the shift. "Everything that worked all year got sacked and whacked," one quant hedge fund source told Business Insider. "This has been a brutal move," said another person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."
• A Morgan Stanley sales desk sent a memo on Wednesday, outlining its traders' take on "the magnitude and velocity of this week's rotation." The note said that "all strategies are down," and warned that if the momentum "morphs" from short sellers covering to a wider selloff by longer term stock holders, "this is likely to spill over to the overall market."
• Willie Delwiche of Baird spoke with Business Insider about the rotation, offering a bullish take on the matter. He says that while the universe of stocks considered momentum names may reshuffle, the strategy itself will remain strong and keep the more than 10-year bull market afloat for a while longer.

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• The CEO of Thasos, an alternative data company, has stepped down and roughly two-thirds of its staff have been laid off, sources tell Business Insider. 
• Thasos was struggling to sell its product, despite the fact that the company was on Bloomberg's alternative data platform and hedge funds are planning to pump more money than ever into the market.
• The struggles of Thasos might be a sign that the booming alternative data space — which Deloitte projects to exceed $7 billion in 2020 — is not the gold mine some believe it to be.
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Thasos Group seemed to be doing everything right. 

Part of the booming $7 billion alternative data industry, the company collects location data from cellphones to help hedge funds make money. 

Founded in 2011, Thasos was worth $42 million, had ties to MIT, and boasted a blue-chip CEO whose prior company Sense Networks was once named the "The Next Google" by Newsweek. Thasos was also part of Bloomberg's newly launched alternative data marketplace, meaning it had a stamp of approval from the data juggernaut. 

But Thasos struggled to make money selling to its main financial services clients and in August was forced to fire two-thirds of its staff, sources tell Business Insider. Its CEO and cofounder Greg Skibiski also stepped down.

Read more:Alternative-data provider Quandl is changing its strategy as industry giants like Bloomberg and S&P push into the $7 billion market

Thasos went from roughly 40 people at the beginning of August to less than a dozen weeks later. Skibiski chose to step down and transition into a "non-executive chairman" role, a Thasos spokesperson told Business Insider, and will still be involved in "managing the day-to-day operations of the firm."

Skibiski even tried to pivot to selling to real-estate firms as a last-ditch play for more sales. The decision also frustrated employees, according to a source familiar with the matter, as they internally lacked the expertise to dive into the new field. 

Thasos said the firm has recently been "broadening the verticals to which they sell," and has "paying customers" in the commercial real estate space.

"Financial services remains a significant market opportunity," the spokesperson said, and a new CEO will "be announced shortly." 

The market is experiencing 'alternative data fatigue'

The problems Thasos faced aren't unique, alternative data industry participants and observers say — while there's no shortage of hedge funds interested in buying data, the market is becoming both crowded and commoditized.

"We may have a bit of an alternative data bubble," Mike Chen, a portfolio manager at PanAgora Asset Management, told Business Insider. "I believe that a lot of the more advanced alternative data users — advanced hedge funds and investors — are probably experiencing what I might call 'alternative data fatigue.'"

Read more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.

Justin Zhen, cofounder of alternative data provider Thinknum, said that the influx of participants in recent years has made it tough for consumers of alternative data to sort through all their options.

Users of alternative data have previously stated how difficult it is to get a competitive edge from the complex data sets, comparing it to sifting through dirt to find only a few gold nuggets. Coupled with the considerable money and resources a firm needs to invest to bring on and test the data before using it in strategies, sorting through alternative data has become a nearly impossible task. 

"I think the space has gotten really noisy, especially from a data buyer's perspective," Zhen said. "Two years ago there were two dozen vendors and now there are hundreds of vendors. From the data buyers perspective, the hedge funds and asset managers, it's hard for them to know who the worthwhile data sets are to talk to and bring on."

Investors quickly drop feeds they don't see value in

As a result, investors have gotten more aggressive with how quickly they'll move on from a data set, making life more difficult for the original companies that made the industry buzzworthy.  

An influx in the amount of options means data sources might have a limited amount of usage, Nick Tsafos, a partner at EisnerAmper who works with hedge funds on their data strategies, told Business Insider.  

"What [hedge funds] are saying is we need data points of the things we are interested in today, and we don't know what we are going to be interested in the future," he said. 

Some data points have a shelf life — once they're crowded, hedge funds move on.

See more:Hedge funds are getting swamped by alternative data. Some want to fast-track how they buy it and focus back on trades. 

For instance, right now a datapoint that can measure tariff impacts on China would be extremely helpful, Tsafos said. But the current interest from hedge funds can dissipate quickly. 

At the well-known alternative data conference circuit Battlefin, data vendor numbers have gone up to the point where conference organizers need to find a bigger venue for this year's New York leg. Longtime industry player Barry Star, who runs Wall Street Horizon, a data company that organizes and analyzes corporate events, told Business Insider at Battlefin that roughly half of the young start-ups at the conference won't be back next year.

"A lot of folks out there, they're trying to sell the first telephone," Star said. 

Tammer Kamel, the CEO of Quandl, an alternative dataset aggregator that Nasdaq bought at the end of last year, told Business Insider that the entry of S&P and Bloomberg into the space forces everyone to adapt. For Quandl, which was acquired in 2018 by Nasdaq for an undisclosed amount, that means creating their own proprietary data along with licensing exclusive datasets for their platform.

"I like to think it's us staying ahead of the curve," Kamel said. "We were one of the pioneers in this space ... For us to continue in a leadership position, we've got to be on to the next thing."

Some believe there is still money to be made in alt data

To be clear, there are still those that still see plenty of opportunity within the alternative data space. Atit Amin, an associate at venture firm Pivot Investment Partners, told Business Insider the struggles of one company aren't indicative of the entire market. Pivot, which makes early growth equity investments, recently led alternative data player Earnest Research's $15 million Series B. 

"I think we are still in the early innings of investment in the alt data space," Amin said. "As long as the move from active to passive continues, it's just going to further the interest in trying to hunt for alpha generating ideas and opportunities. I don't think this is necessarily a black mark on the industry." 

A recent survey of 76 hedge funds by law firm Lowenstein Sandler found that 82% of survey participants plan to increase their alternative data spending. 

Read more: Pricey data, slashed fees, and poor returns are hurting hedge funds' margins —and some are getting in the business of helping their rivals

And while Thinknum's Zhen admitted there will be a culling of the herd, it might still take a while. Despite the amount of data providers that continue to pop up, there are also many traditional investors that haven't even dipped their toe in the alt data waters. 

"There are really big investment funds, and even some banks, that don't quite know what they are doing with alternative data yet," Zhen said. "That lends itself to a much longer runway for vendors to figure things out. ... I think the space is still growing too quickly."

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• Goldman Sachs said it has remade its sentiment indicator, and the new data shows stocks are at risk for a near-term decline as hedge funds and foreign investors have ramped up their exposure.
• Arjun Menon says the new indicator includes far more data and does a better job predicting what the market is likely to do in the weeks ahead.
• He added that this extreme positioning could remain a challenge if economic growth didn't pick up in the months to come.
• Click here for more BI Prime stories.

Getting a grip on market sentiment can help you figure out where stocks are likely to go next, and Goldman Sachs says it's refined a tool that will allow you to do just that.

Portfolio strategy associate Arjun Menon said the firm tore down and revamped its sentiment indicator to include nine different measurements of how investors were positioned in stocks. In a recent note to clients, Menon said the new sentiment indicator captured more detail and did a better job predicting the market's direction.

As it stands now, the updated indicator shows that the benchmark S&P 500 is on track for a decline of at least 2% in the next eight weeks, he said. If positioning stays the way it is, and the economy doesn't improve, it could pose a larger obstacle for the market in the future.

"The likelihood of a positioning-driven sell-off in the near-term has increased," he wrote. "If economic growth remains modest, extreme positioning could hamper stock returns going forward."

In the past, Menon said, Goldman measured sentiment using data from the Commodity Futures Trading Commission. Now it's complementing that with eight other types of data to get the most accurate picture of how households, hedge funds, active mutual funds, foreign investors, and others are investing.

Combined, those groups own 80% of stocks, Menon said. He said the updated sentiment indicator has been rising for three weeks and was giving off a "stretched" or high reading. Because sentiment is a contrarian indicator, that's a negative signal for stocks.

Menon said net exposure by hedge funds hasn't been this high since July 2018, and demand from foreign investors has risen to its highest level since March.

"Aggregate equity positioning is 1.2 standard deviations above average, indicating that positioning poses a downside risk to S&P 500 returns in the near future," he wrote. Here's what the new sentiment indicator is showing:

Regression analysis lets Goldman link the positioning data to subsequent market performance dating back to 2008. It says extreme readings like the current ones are a negative indicator lasting five to eight weeks.

Menon added that the additional sources of data gave the new sentiment indicator much more predictive power than the old one, lending more weight to his forecast of short-term declines. He added that the new indicator was more accurate than the old one when positioning is light, and similarly effective when positioning is stretched.

Still, he said the high levels of sentiment weren't necessarily a disaster because if economic growth were to get stronger, it would support higher stock prices. That's what he expects, and he maintains a year-end target of 3,100 for the S&P 500.

SEE ALSO: Famed economist David Rosenberg explains how the Saudi oil fiasco's impact on US consumers could hasten the next recession

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• Last week's momentum slide and a surge in oil prices earlier this week thrashed many hedge funds.
• Investors like Jon Aikman, who sits on the University of Toronto's endowment and pension-investment committees, want hedge funds to "stick to their guns" in times of market turmoil. 
• "If they're just going to sell out, I can get an ETF to do that," Aikman said.
• Click here for more BI Prime stories.

The markets are causing a panic. But investors are hoping hedge-fund managers trust their process and stick to their strategies. 

A crash in high-flying growth stocks last week smacked momentum-tracking hedge funds, with one US pension seeing its trend-following funds surrender their August gains in a couple days. And a huge spike in crude-oil prices this week hit many funds with bearish views on the commodity. 

The best thing whiplashed hedge funds can do right now is stay the course, Jon Aikman, a finance professor at the University of Toronto, said. He sits on the school's endowment and pension-investment committees, which allocate more than $5 billion. 

He wants hedge-fund managers to "stick to their guns and continue what they are doing."

"If they see dislocation they can take advantage of, go for it, but I don't want to see a big sell-off," Aikman told Business Insider. "If they're just going to sell out, I can get an ETF to do that."

Read more: Hedge funds are getting whacked in an 'unheard of' stock-market shift — and a leaked Morgan Stanley memo warns of possible pain for months

In an email, David Bahnsen, a wealth manager at Bahnsen Group who manages more than $1 billion, said "in times like this, and any other time, our objective with hedge funds is, always and forever, non-correlation."

"An absolute return objective is preferred, but we are never looking for our alternative strategies to 'lean into' volatility or momentum, on either side," Bahnsen wrote.

Likewise, Darren Wolf, who leads Aberdeen Standard Investments' alternative investment strategies group, said he didn't look for managers that "try and be heroes" during times of market stress.

"We try to find managers that think more strategically about what the moves mean and how it may impact the medium-term outlooks for their strategies," Wolf said. 

One hedge-fund manager with total assets in the billions said they tried to explain to investors that drawdowns happen in times like these, adding that "it's how you react to market dislocation that makes a fund." 

Cautious institutional investors like pensions, endowments, and foundations have already pressed hedge funds to think more long-term. Hedge funds' equity exposure meanwhile is at the lowest level in a decade.

On the other hand, hedge funds are under pressure to prove their worth to investors who have complained about the industry's high fees. Many managers are seeing opportunities in the fragmented market.

One hedge fund that focuses on technology stocks was excited for the "reset" of the market for growth stocks, which were hit hard during momentum's slide last week.

Another fund that looks to make money in times of market stress said it usually saw inbounds from potential investors flood in after a serious dislocation.

"Clients always worry when there are unexpected events and market moves. The question is always — has it hurt our portfolio? — fortunately, the answer is no. We're right-sized and we've got hedges in place. We've also been taking advantage of the volatility to add to positions," Michael Hintze, the founder and senior investment officer of the $18 billion fund CQS, wrote in an email to Business Insider. 

Read more: Hedge funds may be getting slammed (again) after oil's shock surge followed a record shift in equities

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• Goldman Sachs' Quantitative Investing Strategies group is one of the Wall Street bank's biggest and fast-growing units. 
• The unit, known as QIS, has nearly doubled its assets under management in 2 1/2 years to almost $180 billion. That makes it bigger than most of the quant hedge funds. 
• That success will help Goldman seize on one of the few secular growth opportunities it has right now: a surge in demand for alternatives investing.
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In 1989, when Goldman Sachs started its computer-led investing group, the term big data hadn't entered the lexicon. 

Yes, engineers were using modeling techniques to explore large datasets. But Silicon Valley had yet to come up with a way to store and parse the growing pile of data created as computers took over every corner of society. Goldman could cast its eye over wide swaths of the investing universe — 13,000 companies — but it couldn't dig too deeply. 

Fast forward to today, and the depth of analysis now possible is a fundamental shift on how Wall Street puts money to work. Gary Chropuvka, the cohead of Goldman's Quantitative Investment Strategies team, which uses statistical methods to invest in public-equity markets, knows this better than anyone. Chropuvka's group has nearly doubled its assets under management in 2 1/2 years to $174 billion.

"As quants, we've always played the breadth game," Chropuvka said in an interview at his 35th-floor office, where a pile of portfolio-management textbooks sat in a corner. "What big data has helped us do is really play the depth game and know more about a company, not just their fundamentals and what's affecting those, but also what's going on around that company."

Chropuvka joined Goldman in 1998, moved to QIS the following year, and assumed his current role in July 2017. He shares management with Armen Avanessians, a former Bell Labs engineer known for pioneering the role of Goldman's deskside strategists and launching its vaunted risk-management system SecDB. They meet to review portfolio returns each Monday.

One of Goldman's fastest-growing businesses 

The business has been on a tear of late, and it now counts among Goldman's biggest and fastest growing. The group's 100 investment professionals managed more than 10% of the assets across Goldman's asset-management unit at midyear. The big-data, or equity-alpha, sleeve accounted for about $45 billion, nearly tripling over the same time period. Smart-beta strategies commanded another $110 billion, while those that tried to mirror traditional hedge-fund strategies had another $19 billion. 

The figures mean QIS can stand shoulder to shoulder with the largest quant funds in the world: AQR manages $194 billion, Renaissance Technologies oversees more than $110 billion, and Two Sigma Investments supervises $60 billion. 

Read more:Goldman Sachs for a long time struggled to win business with quant hedge funds. CEO David Solomon told us 'the picture is very different today.'

That success will help Goldman seize on one of the few secular growth opportunities it has right now: a surge in demand for alternatives investing. Goldman CEO David Solomon has big plans to raise money for the bank's private-equity, real-estate, and hedge-fund strategies. QIS, with its long track record and torrid growth, has a good story to tell and stands to gain from the firmwide fundraising push, even as it has avoided some of the politics that have come with merging other investment teams.  

Quantitative investing is one of Wall Street's hottest trends. Investment managers are increasingly employing enormous computing power and teams of engineers to make money from alternative-data sources like satellite images, credit-card transactions, and information scraped off the web. For those in search of new sources of alpha, the potential is too good to pass up.

Inside QIS, the data crunching has come up with more than 250 signals that can be exploited to make money in the markets. The tally about a decade ago was just 15. The group sorts companies by topics in addition to industry or financial metrics, parses language used in written research reports to gauge analyst sentiment, and analyzes options pricing data collected over the years by Goldman's trading desks, to name just three functions. 

Shadows of the 'quant quake'

The outlook hasn't always been rosy. Goldman's Global Alpha hedge fund, which once managed $12 billion in computer-led strategies, lost 23% in August 2007. It was caught up in what would be dubbed the "quant quake," an event that led to an existential crisis for the industry, and shuttered several years later.

Industry flows didn't turn positive until 2010, according to Hedge Fund Research. But turn positive they did: Quant hedge funds managed $979 billion through June, more than double 2008's tally, according to HFR. They now account for 30% of everything managed by hedge funds.

Read more: The explosive growth of quant investing is paving the way for 'super managers' in the hedge-fund industry

Still, critics persist. The JPMorgan quant guru Marko Kolanovic has blamed recent market volatility on the trend-following strategies of the quants. Other hedge-fund managers have followed suit: Omega Advisers founder and former Goldman partner Leon Cooperman said in December the Securities and Exchange Commission should look into computer trading. Stan Druckenmiller said during the same month that quants were introducing volatility into the markets that could be harmful for other managers.

The theory was tested again last week when a massive shift in the stock market, from top-performing growth stocks to lower-performing names, triggered a sharp shift in "momentum" strategies. While the sharpness of the move reminded some of 2007's quant quake, one quantitative-hedge-fund manager said the industry losses weren't nearly as severe.

While Chropuvka declined to comment on last week's move, he said in the earlier interview that he didn't agree with the criticism. 

Pushing back against the critics

"I struggle with this whole idea, especially around the alpha-crowding piece," Chropuvka said, citing the diversity of strategies that have been brought about by more data. "People have very different decision-making processes. It's not just around momentum, quality, and low vol. Many quants have value-type metrics, which again, usually aren't trend-type strategies that will promote herding. So I think one of the things that quant strategies actually have is diversification."

That will only increase, he said, as new data sources come online. 

So with all this data coming at them, how do the execs in QIS separate the good from the bad? They go looking for raw and unstructured information that hasn't been modified by others and then apply a systematic three-step approach to evaluate its usefulness. 

'A huge edge' 

Step one uses economic intuition — does it make sense? Questions asked at this stage include: Can the team develop an investment thesis or belief around why it will make money? Where does the data come from? How is it stored? How should Chropuvka's team account for missing database fields? 

Once the data is acquired, step two involves conducting research to see if the thesis holds up. Step three is checking to see if the signal or trend has already been incorporated into prices. After all, the data isn't worth much if the market has already figured it out. 

Read more: Industry insiders are predicting a battle between the biggest hedge-fund names for top quant talent

"It's economic intuition first and foremost," Chropuvka said. "Then it's, 'Does the data prove something?' And then lastly, which is really critical, 'Is that information reflected in prices?'"

One of the biggest hurdles to incorporating all the new data sources into an investment process is simply its cost. Goldman spent more than $1 billion on communications and technology costs, where data and data-license expenses appear, over the 12 months through June.

Even here, Chropuvka has a secret weapon: Where possible, the group shares data licenses with Goldman's traders and investment bankers. 

"To the extent we have a license that spans the firm, and we know people have done their due diligence, we take comfort and we use some of it," he said. "We think that's a huge edge."

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• Quandl, the Nasdaq-owned marketplace for alternative data tracking things like web scrapings and satellite images, is bringing in Evan Reich as its new head of data strategy and sourcing.
• Reich previously held the same kind of role, only from a hedge fund client perspective, at $18 billion BlueMountain Capital Management. He will be leading a team tasked with fining new datasets for Quandl to sell.
• Quandl has been focusing more on creating its own data streams instead of just selling other feeds. That comes as Bloomberg and other data giants have started to crowd into the world of alt-data.  
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Quandl had a hole, according to its chief executive and founder Tammer Kamel. 

The platform has been in the business of selling alternative data  — like cell phone-tracked foot traffic and satellite images of shipping barges leaving port — to hedge fund clients. Nasdaq bought Quandl at the end of last year, and now it's eyeing a pivot to actually creating data products in addition to selling others' feeds. 

To do that, Kamel needed someone with hands-on experience in using those kinds of data sets to make investment decisions.

In stepped Evan Reich. 

Reich is Quandl's new head of data strategy and sourcing. He had the same role, only from the perspective of a hedge fund client instead of a data seller, at $18 billion BlueMountain Capital Management before it was bought by Assured Guaranty earlier this year.

Before his five-year stint at BlueMountain, Reich also worked at Izzy Englander's Millennium and Steve Cohen's SAC Capital, managing the hedge funds' massive data and research reserves. In 2017, according to a release from Quandl, Reich was a contributor to the project that won the 2017 Nobel Prize for Physics for research on technology used to see gravity waves. 

The new job entails sourcing fresh data sets to bring to Quandl's clients,  and he's also there to serve as a  "sanity check" on new ideas that Kamel and his team come up with.

"His experience is invaluable," Kamel said in an interview with Business Insider. "Evan knows these problems we are trying to solve for clients — he's been living them for his whole career."

See more:Hedge funds are getting swamped by alternative data. Some want to fast-track how they buy it and focus back on trades.

The alt-data industry, despite rosy projections of growth and high interest from hedge funds and others, is becoming more competitive thanks to the entry of behemoths like Bloomberg, S&P, and Refinitiv. Long-time alt data player Thasos recently laid off a majority of its staff and its CEO resigned.

Kamel has been vocal about remaining ahead of the curve to ensure his company does not get squeezed. 

He told Business Insider in a previous interview that Quandl was going to focus on generating more proprietary datasets as well licensing exclusive datasets that clients will only be able to get from his platform.

"I like to think it's us staying ahead of the curve," Kamel had said then. "We were one of the pioneers in this space ... For us to continue in a leadership position, we've got to be on to the next thing."

Reich's addition brings in a voice that can help judge whether an exclusive data agreement with a vendor will be something that interests the hedge fund clients Quandl relies on.

The transition from hedge fund to data aggregator is not a well-worn career path, and Reich said he was drawn to Quandl in part because of the Nasdaq acquisition. He said the opportunity is "so much greater now" for the firm to lead and innovate in the space because of that institutional backing.

Quandl is "unique in the world, having this sort of platform to find things and bring them to market — it's really an extension of what I was already doing," Reich said. 

See more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.

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• At a CFA Society event on Thursday night, Dr. Gio Valiante and Denise Schull told investors and traders that many people haven't trained themselves to correctly learn from mistakes. 
• Mistakes can't be punished by the brain, but instead need to be seen as learning opportunities, said Valiante, who works with investors at Steve Cohen's Point72, including Cohen himself. 
• "It's not about making mistakes, it's about catching them before they kill you," said Svein Backer, the managing director of global equities for Lockheed Martin's $72 billion pension, at the CFA event. 
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Investing is a career path that will inevitably knock you down.

The problem is most finance pros aren't learning the right lessons from those mistakes, according to Dr. Gio Valiante and Denise Schull, two performance coaches well-known in the $3.3 trillion hedge fund industry. 

At an event at the CFA Society in Manhattan Thursday night, Valiante and Schull, along with Lockheed Martin's managing director of global equities Svein Backer, touched on the importance of behavior and emotion, and their impact on a portfolio. 

According to Valiante — who is currently working with Point72 founder Steve Cohen and his team and has worked with Tiger Woods in the past — the two traits constantly "under attack" as an investor are confidence and motivation.

"Most successful people are, to a degree, a little overconfident," Valiante said. The key is to train your brain to not be overly critical of your mistakes, he and Schull said. 

"So many of us are concerned about being wrong when it's just a part of the job," said Schull, who founded the ReThink Group and has been said to be the model that "Billions" character Wendy Rhodes is based off of (a lawsuit Schull filed earlier this year against Showtime and the show's creators was thrown out). 

Managers might need to learn these lessons quickly after the whiplash caused by momentum's slide and oil's rise over the last two weeks. Investors and managers have told Business Insider that they need to stick to their guns, and trust in their strategy in times like these.

 See more: Hedge funds are getting whacked in an 'unheard of' stock-market shift — and a leaked Morgan Stanley memo warns of possible pain for months

Backer, who helps manage Lockheed Martin's $72 billion corporate pension and was a client of Schull's, pressed attendees to not be afraid to cut losses early, while also being willing to buy back in at a higher price if your intuition was wrong.

"It's not about making mistakes, it's about catching them before they kill you," he said. 

What lets Backer think like this, Schull said, is the fact he is now "inoculated against being wrong." Schull and Valiante said that the brain should shift from punishing mistakes to learning from mistakes.

Fear, the two performance coaches said, is not always the best motivating factor. 

"Everyone is too self-critical," Schull said. 

See more: Billionaire Leon Cooperman says the rise of passive investing 'scares the hell' out of him because it's left the market vulnerable to sharp, unpredictable sell-offs

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• While the bankruptcy of British tour operator Thomas Cook has left hundreds of thousands of travelers stranded, a group of hedge funds are poised to make as much as $250 million from the company's collapse. 
• Funds including Sona Asset Management and XAIA Investment owned derivative investments called credit default swaps, which pay investors when a company can no longer service its debt, Bloomberg said in a report.
• The company entered into compulsory liquidation on Monday after efforts to restructure it's debt with key investors failed, according to a statement. 
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The bankruptcy of British tour operator Thomas Cook has left hundreds of thousands of travelers scrambling to find a way home — but a handful of hedge funds could walk away with hundreds of millions in profits. 

Investors including Sona Asset Management and XAIA Investment could earn as much as $250 million on credit-default swaps on the embattled company, according to Bloomberg.

The products are a type of derivative instrument that pay investors when a company can no longer afford to service its debt. They're often used by investors to bet against struggling companies that are teetering on the brink of bankruptcy.

Thomas Cook entered into compulsory liquidation on Monday after weekend negotiations to restructure the company's debt with key shareholders fell through. 

The payouts on Thomas Cook's default swaps still requires approval from the Determinations Committee, a panel of traders that oversees aspects of the global derivatives market. The group is set to meet on Monday to determine whether Thomas Cook's bankruptcy filing should initiate payouts on the swaps, Bloomberg found.

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"We have worked exhaustively in the past few days to resolve the outstanding issues on an agreement to secure Thomas Cook's future for its employees, customers and suppliers," CEO Peter Fankhauser said in a statement on Monday. "An additional facility requested in the last few days of negotiations presented a challenge that ultimately proved insurmountable."

Trading of Thomas Cook shares was suspended on Monday after the company filed for liquidation. Creditors including Lloyds and the Royal Bank of Scotland demanded the firm find an additional $250 million in funding by this week. 

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• Jason Mudrick, the founder and chief investment officer of Mudrick Capital Management, has placed a massive bet on the vaping and e-cigarette space. 
• The high-profile investor's flagship fund has invested nearly $800 million — close to 30% of the firm's total assets — in e-cigarette maker NJOY Holdings, according to a report from Bloomberg. 
• The investment has powered most of the fund's 30% return this year, Bloomberg found. But Mudrick's prized stake in the e-cigarette maker could be in jeopardy as the future of the industry is being called into question by regulators. 
• Policymakers and regulators alike are warning an underage-vaping epidemic could be spreading as vaping-related lung diseases have killed eight people across the US and affected more than 500 others. 
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As regulatory pressure ramps up against vaping and e-cigarettes, a top hedge fund's $800 million bet on the space could be in trouble. 

Mudrick Capital Management — a hedge fund founded by high-profile investor Jason Mudrick that manages about $2.8 billion — has close to 30% of its total assets invested in e-cigarette maker NJOY Holdings, according to a report from Bloomberg. 

The firm's $800 million stake in NJOY has fueled most of its flagship fund's 30% return this year, Bloomberg found. Mudrick's flagship fund invests in distressed companies on the verge of or recovering from bankruptcy.

The fund purchased a 51% stake in NJOY back in 2017 when the company was worth $40 million and fresh out of bankruptcy, according to Bloomberg. The size of the stake has dropped to about 40% after Mudrick sold some shares to earn back its initial investment. 

Mudrick's stake in NJOY was the sole driver of the its 25% return in the second quarter, and without the investment the fund would have posted a loss for the period, Bloomberg reported.

The fund's outsize returns this year stand in stark contrast the fund's competitors in distress investing, according to data compiled by HSBC. The year-to-date average for distressed funds is 5.59%, the bank said in a report. 

Read more: 'Invest in what's scarce': Famed economist David Rosenberg explains how the average trader can supercharge returns in a tumultuous market

But Mudrick's investment could be in jeopardy as the vaping industry comes under greater scrutiny amid a growing number of vaping-related deaths and diseases.

The Trump administration shocked the industry last week after announcing it would work toward removing almost all flavored e-cigarette products from the market. The Food and Drug Administration still needs to approve the effort. 

Top Juul investor Altria has lost about $30 billion in market value since the FDA launched an investigation into a potential link between Juul's products and users experiencing seizures. 

Bloomberg found that the recent scrutiny of vaping threw a wrench in NJOY's efforts to raise new funding. The company was recently looking to raise new capital at a valuation of as much as $5 billion, more than double what NJOY was valued at during a funding round in May.

NJOY abandoned the fundraising effort as the regulatory pressure began heating up on the industry, according to the report.

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• Wall Street's Democratic donors are warning that they won't back Sen. Elizabeth Warren if she wins the party's nomination and that they might even support President Donald Trump, according to CNBC.
• "You're in a box because you're a Democrat and you're thinking, 'I want to help the party, but she's going to hurt me, so I'm going to help President Trump,'" a senior private-equity executive told CNBC.
• Warren has said she plans to break up the big banks, crack down on private equity, and regulate executive pay if she becomes president.
• View Markets Insider's homepage for more stories.

Wall Street's Democratic donors are warning that they won't back Sen. Elizabeth Warren if she wins the party's nomination and that they might even support President Donald Trump, according to CNBC.

"You're in a box because you're a Democrat and you're thinking, 'I want to help the party, but she's going to hurt me, so I'm going to help President Trump,'" a senior private-equity executive told CNBC.

Warren, a vocal critic of big banks, has said she plans to crack down on the financial industry if she becomes president.

In response to CNBC's tweet promoting its story, she said that "wealthy donors don't get to buy this process" and vowed that she "won't back down."

The Massachusetts senator's presidential plans include breaking up the big banks, dividing commercial and investment banking, and forcing private-equity firms to shoulder debts and pension costs tied to businesses they buy.

She said she also intends to get rid of sweetheart tax rates, protect workers when their employers go broke, penalize bankers for failed risky investments, and reverse the Trump administration's deregulation of the financial industry.

"To raise wages, help small businesses, and spur economic growth, we need to shut down the Wall Street giveaways and rein in the financial industry so it stops sucking money out of the rest of the economy,"Warren wrote in a Medium blog post in July.

Warren appeared to top the latest CNN/Des Moines Register/Mediacom poll with 22% support among likely Iowa caucus voters, outstripping former Vice President Joe Biden's 20% share; the poll had a margin of error of plus or minus 4 percentage points. Three-quarters of those surveyed said they held a favorable view of her, and the poll found that 32% of her supporters were "extremely enthusiastic," compared with 22% for Biden.

Her recent momentum means that among wealthy Democratic donors and fundraisers in business circles, the idea of withholding support and potentially switching to Trump "is becoming widely shared," CNBC reported.

Bank executives and hedge-fund managers "will not support her," a big-bank executive told CNBC, adding that Warren's policies would be worse for the industry than President Barack Obama's changes.

"It would be like shutting down their industry," the executive said.

Wall Street executives are saying that Warren "has got to be stopped," Jim Cramer said on CNBC's "Mad Money" this month.

In response to the video, the senator tweeted, "I'm Elizabeth Warren and I approve this message."

The prospect of Warren revealing Trump's tax cut to be a gift to the wealthy has also turned Wall Street off Warren, a hedge-fund executive told CNBC.

"I think if she can show that the tax code of 2017 was basically nonsense and only helped corporations, Wall Street would not like the public thinking about that," the executive said.

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• Uber and Lyft have created a duopoly in the US ridesharing market that puts them on the road to profitability, according to Glen Kacher, the chief investment officer and founder of $2 billion Light Street Capital.
• Kacher juxtaposed their business models with WeWork's to illustrate why they should not be lumped together with other unprofitable tech companies that are tapping the public markets for capital.
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It would not be far-fetched to formulate an overarching bear case against the slew of unprofitable companies that are going public. 

You could even invoke the dreaded b-word: bubble. High-profile companies like Uber and Lyft are raising money through initial public offerings this year at the fastest pace since the height of the dotcom boom in 2000, according to Bloomberg data.

Peloton's stumble in its first trading session Thursday — the third-worst mega-IPO debut since the financial crisis — spotlighted these money-losing companies once again.

But instead of generalizing, Glen Kacher — the chief investment officer and founder of Light Street Capital— would rather study each company's fundamentals to unearth the strong long-term bets.

He is bullish on two companies that fit the bill of the tech-startup mania: Uber and Lyft. Lyft's stock has tanked 47% since its IPO while Uber has fallen 24%. Uber reported a $5.2 billion loss in the second quarter and Lyft bled $644 million in the same period. 

Despite these numbers and the concerns of other investors, Kacher sees a road to profitability for both companies.

"Yes, absolutely" was his response when asked to confirm that he was invested in both companies at CNBC's recent Delivering Alpha conference.

He added: "We look at ridesharing and say, 'the end market is huge.'"

Read more: The managing partner of Andreessen Horowitz explains why his firm is investing in a budding technology that 'will be applied in almost every area'

Besides the size of the addressable market, Kacher sees an advantage that other parts of the sharing economy do not have. 

To drive home his point, he singled out WeWork, the shared-office company that was once one of the most valuable startups in the US but had to postpone its IPO after intense scrutiny of its business model and executives.

"If you rent a room that has five desks for your startup, there's not that much pooling efficiency," Kacher said.

He continued: "Those five desks are only used by your employees. But in an Uber or a Lyft situation, that car drives around multiple cities in a day and may have 15 or 20 riders ... that's a very unique economic solution as opposed to WeWork that's just carving a floor up into very tiny little spaces."

Kacher also sees the ridesharing market in the US as a well-oiled duopoly. Led by Uber, both companies are flexing their pricing power and raising fares to try and offset their losses.

Lyft is inadvertently benefiting from the fact that Uber is fighting in ridesharing and food-delivery markets outside the US, Kacher said. Lyft is really only playing in "one and a half markets"— the US and Canada — but can also improve its margins by following Uber's lead and raising prices, he added.  

Light Street, which manages $2 billion in global technology assets, had invested in both firms before they went public. The stakes are worth nearly $137 million, data from regulatory filings compiled by Bloomberg show. 

SEE ALSO: The 'single biggest risk' to investors is being widely ignored — and Morgan Stanley warns it could spawn a recession within months

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