Monday, March 12, 2018

Hedge Funds: "The Tipping Point for Alternative Data"

My introduction to the subject was when one of my mentors tasked me with counting tractor-trailers pulling up to the loading dock of a company he was considering buying.
After three days I asked if this was the highest use of my time and was "promoted" to scouring help-wanted ads to see who was growing enough to be hiring.
For our younger readers, help-wanted (or position available) ads were a type of classified advertising found in newspapers.
Newspapers were a medium of communication that....

From All About Alpha:
The Deloitte Center for Financial Services has put out a white paper on “Alternative data for investment decisions.”

The term “alternative data” as Deloitte uses it refers to any set or sets of data that may be useful for investors but that is outside their traditional/conventional frame of reference.  In this age of “big data” that frame is going to have to expand, and the use of (say) communications metadata or satellite imagery, which might still be innovative this week, might be quite common next week, and a bare necessity for survival the week after that.

A fairly simple example of the use of satellite imagery involves the analysis of parking lots, which “is replacing the old-school approach of physical foot-traffic counts with clickers.”

The traditional model for data analytics by IM firms (however ‘alternative’ they may be in their assets or strategies) involves as the paper puts it “structured data sets acquired from various information providers” that are then “aggregated and loaded into proprietary quantitative models.”
But the sometimes unstructured data sets on which investment managers will hereafter be expected to draw are large, heterogeneous, and would have to be processed at an extremely fast rate to be of any use. This requires machine learning and cognitive computing for the analytics.

Benchmarks on the Fly
One of the problems distinctive to the push on the part of IMs to employ alternative data is, frequently, the absence of any historical benchmarks. Consider a program that sorts the positive and the negative social-media comments on a particular stock ticker. This can produce, simply and cheaply, a ratio of positivity. But is today’s ratio high or low? Compared to what? Maybe we should wait until there have been five years’ worth of such ratios to do our back testing and to develop a sense of what this ratio means, what moves it might be said to predict.

Ah, there’s the rub, for in this sleep of back testing what dreams may come?  As the paper puts it, “Firms that strictly adhere to a policy requiring five years of back testing before utilization may miss the most valuable periods of alternative data sets, before proliferation decay sets in.” Over those five years, presumably, other firms proliferate that have figured out how to use this ratio, and the trades the ratio might suggest arbitrage away its edge....MORE
From Deloitte:  "Alternative data for investment  decisions: Today’s innovation could  be tomorrow’s requirement". 
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