Buy Side Needs to Embrace Web06.30.2014
Asset managers need to develop investment strategies that incorporate data and information from the web or they will get left behind according to data provider Eagle Alpha.
Emmett Kilduff, chief executive and founder of Eagle Alpha, told Markets Media: “The buyside have to complete an education process. A lot of people don’t realise how much valuable information is on the web.”
For example, the New York Federal Reserve uses the Internet to help understand consumer inflation expectations according to a report from Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York. This month is the one-year anniversary of the Fed’s Survey of Consumer Expectations.
Colas said: “As you cull through the results of the NY Fed’s new foray into internet surveys, the first thing that strikes you is just how different the results are from common Wall Street wisdom about critical issues like inflation and interest rates.”
Kilduff, a former Morgan Stanley investment banker, founded Eagle Alpha in 2012 to curate the web for relevant and actionable information for Wall Street.
In a white paper, “Discovering the Web’s Hidden Alpha”, Eagle Alpha said Wall Street has been hesitant to use the web as a source due to the difficulty in finding the right information and compliance concerns such as the requirement to store data for five years.
The white paper highlighted some firms who are already using the web such as hedge fund Bridgewater which has publicly disclosed it analyses internet data to use in real-time economic modelling.
The paper said: “Greg Jensen, Bridgewater’s co-chief executive and co-chief investment officer has said that they use sites like Amazon India to track inflation “during a balance of payment crisis on a moment-to-moment basis” and thus can tell if any sharp currency moves have filtered down to end prices.”
Tim Steer, equity fund manager at Artemis, said in an email to Markets Media: “Social media is an increasingly important part of understanding companies, particularly as traditional sources of information on companies have become quieter: closer regulatory scrutiny means that companies are more cautious with information disclosure, and investment analysts are providing ever less insight. Adding this new element to my investment process has helped raise assets under management.”
Kilduff said a key differentiator of Eagle Alpha is that the firm curates the entire web, not just Twitter, and analyses sources including blogs, LinkedIn, Facebook, Sina Weibo in China. The firm produces market-moving information sourced predominately from tweets and blogs; unique color such as chief executive and expert commentary from the web that is not found in traditional media; and data-driven analytics on longer-term trends and themes.
“Traders want market moving information while portfolio managers want unique colour,” Kilduff added.
Seth McGuire, director of business development at Gnip, a unit of Twitter, said in the white paper that they provide “over a dozen” large quantitative hedge funds with the entire Twitter firehose. However Eagle Alpha can compile the best 200 accounts to follow on Twitter for any sector or investment theme.
Since November 2012 Eagle Alpha has identified the top 10,000 stock market influencers on Twitter and from next month this information will be made available to quant funds.
Eagle Alpha identifies the most relevant data for clients using online tools such as Google Correlate in addition to licensed software and a proprietary algorithm. As well as using technology, 11 research analysts at Eagle Alpha use their judgement to monitor the daily lists.
The white paper gave examples of how to use the web in the investment process such as using data from location-based social networks like Foursquare which allow users to “check-in” at venues including retail stores; analysing images with facial recognition software and geo-location data and preparing pre-IPO reports.
Kilduff cited online information available on sectors such as technology, media and telecoms and the pharmaceutical industry. For example, one website aggregates data from US prescriptions for all drugs.
The white paper said: “In the treatment of type 2 diabetes we see that Januvia is the most common drug prescribed, but we see highlighted the rapid penetration of Invokana since its launch. This information is particularly interesting therefore for analysts monitoring drug trials or patent expirations.”
Kilduff added: “We aim to attract more long funds and develop more thematic products. Going forward it is a big opportunity.”
Featured image via Wikimedia Commons under Creative Commons
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