Big Data is a big deal

Big Data is a big deal

Qaisar Hasan - Portfolio Manager

Qaisar Hasan

Portfolio Manager
Gene Getman - Client Portfolio Manager

Gene Getman

Client Portfolio Manager

Big Data is a relatively new and exciting development that has the potential to re-shape the investing landscape.

Through technological advancements and cultural adoption of digital trends, humans, businesses, governments, and machines now create data in greater orders of magnitude than humanity ever thought possible. Over 90% of the world’s data has been created in the last two years, across a vast range of mediums and sources. All these digital footprints, when anonymized and amalgamated across millions of people, allow investment managers to draw connections and identify new patterns.

That, in essence, is Big Data. It is the incomprehensively vast amounts of real-world commercial data that is being created and the attempt of data scientists to make sense of it with the help of new technologies and statistical approaches.

Recent trends have contributed to greater sophistication of data science and analytics capabilities, as well as the volumes of data available for analysis. These breakthroughs are being applied to a wealth of alternative data sources (e.g. geolocation, web traffic, app downloads, government statistics, consumer transactions) to create a more holistic view of business fundamentals.

Given the extremely competitive landscape for equity investing, the appeal of Big Data is understandable.

The proliferation of Big Data is a recent event, and we are still in the early innings. This new “alternative” form of data has just surpassed the available market and financial data that investment managers have based their investment insights on for decade, and while legacy data sources are no longer growing, we anticipate the amount of alternative data available to quintuple over the next 5 years.

Given the extremely competitive landscape for equity investing, the appeal of Big Data is understandable. For investors used to thinking about investment strategies in a binary - discretionary or systematic – mindset, Big Data offers a fresh alternative that blends best practices from both fields to generate uncorrelated investment insights.

However, translating this data into actionable insights requires unique skillsets that represent a significant barrier to entry.

 

Challenging perception

People tend to talk about the success stories of Big Data, but the hurdles to using Big Data effectively are greatly underappreciated. It seems contemporary perception of Big Data is that of a tool – an overlay or product that can be purchased and implemented into legacy investment frameworks – that turns discretionary managers into “quantamental” or adds to the vast toolkit of quantitative managers.

We prefer to think of big data not as a tool, but as a new wave of thought, one that requires a new investment framework tailored to alternative data’s unique challenges and limitations if hedge funds are to capture any alpha from it. Furthermore, efficiency with respect to evaluating, refining, and contextualizing data is more paramount than access to scale and resources. These processes must adapt as fast as data evolves to stay ahead.

Although Big Data has become a common discussion topic, the actual practices and specific challenges behind it largely remain a mystery. In this report, we discuss the factors driving growth in Big Data, examine investment use cases, and outline key criteria for success.

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