HFM Global recently published a special report titled “Big Data and the Rise of the Machines” which explores the impact that technology and alternative data will have on the investment landscape. The report was sponsored by 7Park, Societe Generale, and YipitData. Here’s our key takeaways and favorite quotes:
- Using alternative sources to generate alpha is not new. The report recounts the days of 30 years ago when certain traders had a true information edge “George Soros, for example, had people on the ground in western and eastern European capital cities to get an early sense of how GDP releases would affect currency and interest rates,” says Anthony Lawler, co-head of GAM Systematic.
- Fundamentals of investing haven’t changed, but decision cycles have shortened. “Although the stories you hear about data sourced from satellite imagery and mobile devices sound very sexy, this technology and data are ultimately tools to better understand fundamental drivers of companies and sectors while reducing decision-making cycles”, says 7Park’s co-founder and CEO Alex Nephew.
- Alternative data is picking up with discretionary managers. “The skill-set divide between fundamental and quant investors is becoming narrower every day, and with this change we believe funds of all types will continue to seek alternative data products as a driver of alpha,” says Nephew.
- Netflix or Blockbuster. One of the most striking themes in the report is the concept that the rise of alternative data has placed the investment industry at a crossroads. This juncture being comparable to what corporates faced with the rise of the internet in the 1990s. “Funds can either embrace alternative data, and become the Netflix of their industry, or they can ignore it, and risk become the equivalent of Blockbuster,” says Vinicius Vacanti, co-Founder and CEO of YipitData. Blackrock agrees with YipitData: “We believe that in order to generate sustained alpha, investors should embrace acquiring, analysing and understanding the fast growing universe of data,” BlackRock adds. “Those who are unable to do so run the risk of falling behind in a rapidly changing investment landscape.”
- Misconceptions about alternative data. According to YipitData’s CEO “there are two main misconceptions about alternative data, the first is that it is relevant only for quant investors. We have 80 investor clients and none of them are quants. They are fundamental investors who recognise that data is as important as financial statements.” “The second misconception,” he says, “is that once data is published it is immediately priced in, so you don’t have to look at it. That’s like saying you don’t have to look at financial statements because they are priced in the moment they are released. Funds are recognising that data analysis and interpretation is a real skill that needs to be developed over time.”
- Not all datasets are created equal. “Unfortunately, the volume and availability of data does not equal signal value,” says Nephew. At Alternative Data Insider we agree, finding the dataset that uniquely meets your needs and has a historical track-record of reliability is paramount.