Data Hunters are the new Whale Hunters
Herman Melville published Moby Dick in 1851 during the American Renaissance. Melville writes with real autobiographical details from his own tenure on a whaling vessel. He could not have written a novel so ambitious without having first hand experience. It is hard to intellectualize this now but before kerosene, and the widespread use of dinosaur fossils to run our modern combustion engine, people actually used whale oil for energy to light lamps, make soap, and so on.
Melville had previously had some success as a novelist, but he was sure that this would be his masterwork. To his surprise during his lifetime it sold very poorly (~5,000 copies before his death). Maybe it was too complex or maybe it just felt too familiar seeing men get lost at sea fighting whales. An inflection point came Post World War I where it somehow got picked up and popularized as the Great American Novel for being a classic story of struggle which somehow became more relatable. The subjective popular collective was finally more able to empathize and recognize its genius. Advance our point of view to this generation complaining about the removal of the headphone jack in an iPhone 7 by $AAPL to push $159 wireless earbuds. Every generation has its struggle.
Ok so what does this have to do with data? Everything. The crude tools and plans that adventuring whaling ships used to enrich the whaling barons are laughable two centuries later to be sure. If whaling were legal now (and thankfully it is not) the nautical and oceanographic data collection tagging & tracking capabilities available would make hunting whales incredibly efficient. So efficient that we would hunt them to extinction while listening to podcasts and sending Snapchats from the comforts of a remote location.
Great so how does this tie back to Wall Street? The days of asset managers collecting fees for nailing whale sized trades simply with standard financial data are fading. Just as outmoded as it is going deep in to the sea for years with untold risk and misfortune for the crew of a whaler to hunt Moby Dick it is equally unjustified for LPs across institutional categories to hand capital over to funds that are only using traditional financial data tools to seek alpha. Further if the $3 trillion in hedge fund assets are all piling in to crowded trades all of their alpha will be extinct. The trend of inflows and outflows increasingly favors passive strategies over active strategies because these crude data intelligence tools and analytics are not enough to help most hedge funds stay ahead of the market. Hedge funds without the right tools and middling returns will be hollowed out by the invisible hand.
Enter alternative data and the introduction of The Data Hunter. The Data Hunter is an independent consultant or full time employee(s) of a hedge fund that are tasked with the job of finding unique data sets. Some of this data has never before been made available to investors in a systematic way and becomes a prized possession for the chosen few that have access. The Wall Street Journal acknowledged this trend last week in “ Wall Street’s Insatiable Lust: Data, Data, Data”.
Alternative data includes satellite imagery, social media, weather, location, credit card payments, and local prices. One of my personal favorites is Premise which is human directed data from around the world, processed, and machine refined to create insights. Why would a hedge fund or a corporation want to wait for price and purchasing indexes to be released by government data collection bureaus when there are millions of local data points for everything? Coca-Cola pricing in a country is a great bellwether of a country’s economic health.
For portfolio managers that are trading Netflix for example, instead of waiting for refreshed corporate guidance or updates to sell-side research it is considerably more useful to have the key drivers of the stock which are non-financial localized data. Netflix growth is primarily driven by international streaming subscribers, thus a preferable alternative data package would include data on each addressable country that contributes to this number with a review of local bandwidth & broadband penetration, latest GDP per capita, internet affordability, and real time PPP to the latest market exchange rate. This second layer of data drivers including real-time localized aggregated data is the answer to driving alpha returns and taking down whales. The data provider of the future for hedge funds offers a library of this type of alternative data. If you are a portfolio manager it has never been more urgent to ask, who is your data provider? What alternative data do they offer?
“Call me Ishmael.”
#AlternativeData #HedgeFunds #DataHunter
Originally published at https://www.linkedin.com on September 20, 2016.