Harnessing Big Data to Boost Idea Discovery

A lot of noise has been made recently about potential market bubbles beginning to percolate anew as a result of the seemingly worldwide epidemic of ‘easy money.’ Headlines everywhere scream about the pummeling of interest rates and manipulation/printing of money by central bankers across the globe. Speculation abounds as to what the end-game is, what the consequences of the chase for yield in riskier instruments combined with the addiction to the easy money will bring to bear. We saw what happened in the cases of tech stocks in the late 1990s and early 2000s and sub-prime loans subsequently.

David Marra, Arialytics

In this risky environment, fund managers are scrambling to diversify their portfolios, uncover new opportunities and push their research teams to their limits in search of yield and solid investment ideas. I can’t help but think of the old Janus commercials, where they touted how they would visit companies, turning over every stone while ‘kicking the tires.’ One particular commercial comes to mind, that of a web hosting company. Janus apparently discovered that the company didn’t use water-based systems, like sprinklers, to extinguish fires in an emergency, so as not to damage their expensive servers. Janus wound up purchasing the company’s stock. Taking the investment firm at their word, let’s assume they visit 10 companies per quarter. Then let’s say that out of the 10 companies they visit, two make the cut and are added to the fund. That’s four months of travel and due diligence, for two solid investable leads. In a world where scalability and speed count, that's not very scalable or fast.

[Big Data Could Transform Global Financial Markets]

What if a fund manager could use vast amounts of information to hone in on the best investable ideas, and then go and kick the tires of the select few that make the cut? What if the fund manager could do that in a matter of days, rather than months?

Or take the example of a global equity fund. The fund manager has a limited range of countries and industries that he or she can closely track and many questions they’d like answered about other regions. Or perhaps they want to maintain their focus on just a handful of countries or regions, but would like to double or triple the number of global equities on their radar for potential future investment. Short of doubling or tripling your research team, how do you achieve that kind of research scope?

By embracing and properly harnessing the power inherent in big data and the evidence-based information edge it enables.

Much like the iPhone revolutionized how people used cell phones, new data streams, algorithms, and high performance computers are changing the investment research paradigm. When the first iPhone arrived on the scene, some people said ‘it's a piece of glass, where’s the keypad?’ But early adopters instantly recognized the revolutionary technology and pretty soon everyone followed. Now when Apple makes an announcement, people interrupt their routine to see ‘what’s next.’

What’s next for investment research is the extraordinary acceleration of the idea discovery and validation process, so that a fund manager or institution can achieve better and deeper insights, at a speed the folks at Janus back in the late 1990s would have scoffed at. What took them an entire calendar quarter to achieve in 1999, now takes hours.

By assembling advanced data sets with deep information content, mutual funds and other institutions can now test and validate investment ideas with virtually no bias, arming them with insights that weren’t available and would have likely remained hidden just several years ago. Vastly increased research productivity frees up valuable time, bolstering alpha capture and creating better investment outcomes. Capabilities that were once a pipedream are now just a data set and an algorithm away from being realized.