Hedge funds struggle with AI-generated data rot

The reliance on alternative data—non-traditional metrics used to gain an investment edge—has hit a wall. According to a Neudata survey, the surge in AI-driven vendors has degraded the reliability of information once considered essential for market bets. Industry experts point to two specific failures: providers using models to hallucinate or fabricate data points, and firms cutting human quality-control staff in favor of automated systems.

Daniel Entrup, cofounder of AggKnowledge, notes that buyers are increasingly frustrated by 'black box' processes that lack transparency. Hedge funds, which prioritize strict regulatory compliance, often struggle to verify how these AI-generated datasets are produced. Despite the push for automation, there is little evidence that vendors are seeing higher revenue for these AI-heavy products. Buyers remain skeptical, preferring to run raw data through their own proprietary systems rather than trusting a vendor’s LLM. As one fund manager noted, a single hallucination is enough to pollute an entire signal, rendering the dataset worthless for high-stakes trading.