Data science is transforming the way hedge funds and asset managers work. What do they need to know about the processes, platforms and skills required for harnessing data in the search for alpha?
- Technology is shaping the search for alpha, with data as the essential element for fueling processes and data scientists as the architects of success.
- Harnessing data in the search for alpha requires access to market-leading information, the right technology platform and experts who know how to utilize the data properly.
- A mosaic of information to help asset managers find alpha now includes alternative data sources, such as the Internet of Things or crop and commodity data.
Finance looks drastically different today than it did even a decade ago as technology transforms how hedge funds and asset managers work.
Machine learning, natural language processing and text mining are just a few ways technology is shaping the quest for alpha, with data as the essential element fueling these processes and data scientists as the architects of success.
We recently had the opportunity to speak with Lydia Tomkiw, reporter for FundFire, an FT Specialist publication, about the shifting sands in the quest by hedge funds and asset management firms for alpha.
Here, we highlight some of the main takeaways from that discussion.
Data in the search for alpha
Finding alpha in today’s financial environment requires a mosaic of information to help hedge funds get in front of earnings.
That mosaic can comprise information from both traditional and alternative sources.
Traditional sources are those beyond typical macroeconomic and financial data, and which now include data insights from satellites that count cars in store parking lots to project quarterly sales, for example.
Alternative data sources, which incidentally are becoming more mainstream, now span everything from cell phone data (that provides even greater accuracy than satellites) to the Internet of Things data, which is compiled from the devices now running households around the world, to even including sources such as crop and commodity data.
It’s all becoming much more sophisticated. The mosaic is much more complex. And the underlying data is more messy. There is a lot more work that needs to be done with the data today than in the past.
While compilation of the right data is a critical component when seeking alpha, it’s only one piece of the equation.
Data — whether a firm’s proprietary information, from a third-party financial-market provider or featuring alternative sources — is only as good as the platforms on which it is processed and the people doing the processing.
Doing more with data
The financial industry is undergoing sweeping change, including what I refer to as the democratization of access to technologies that allow users to do more with data.
In the last four or five years and after a decade of cloud computing, there’s a lot more open source technology enabled by the big cloud vendors, which can be used to analyze large amounts of data.
We are living in unprecedented times given that deep learning is now accessible to the average person.
This means that extracting valuable insights in the quest for alpha can be much more mainstream. The ability to leverage the latest technologies and technological thinking is changing the dynamics in the quest for alpha.
Data science know-how
Nearly all large financial institutions have hired data science teams to build out complex models on open source technologies.
When you hire the data scientist, there are a host of related skills that are also needed. For instance, data engineers are also essential for getting the data in the proper shape for processing. And, full stack developers are the ones who can build the infrastructure.
Success lies in the data utilized on the tech platforms by the data experts who know how to manage it. And the future of finding alpha is aligned to putting the mosaic together to build predictive analytics.
It’s a complex web of dependencies that you have to get right in order to be able to make a difference and generate alpha.