Discovering the web’s hidden alpha
25 years ago, the World Wide Web was born. In November, 1989, Tim Berners-Lee made the first communication between an HTML client and server through the internet. In its quarter of a century life-span the web has evolved to become the largest interconnected pool of information the world has ever seen. Certain industries have led the way in taking advantage of the huge business potential this has created. Many customer-facing businesses now routinely analyse social media trends to determine customer sentiment, and online retailers such as Amazon systematically harvest users’ browsing data in order to tailor their offering and boost sales.
Yet asset managers – who perhaps more than anyone else rely on information to make money – have largely undervalued the web as a data source. Part of this stems from concern over the sheer volume of data involved: for example, on average there are 277,000 tweets, 2,460,000 Facebook posts and 4,000,000 Google searches every minute of every day. Forget the haystack, trying to find useful and reliable information within this is like trying to find a needle somewhere in the Milky Way. But this is a challenge everyone faces. Where asset managers – and indeed the wider financial services sector – face a more unique barrier is the issue of compliance. Strict protocols mean that many firms’ computers restrict access to social media and online content. In some cases, employees can’t even scan the web on their own personal devices.
But opportunity knocks. Over the course of the last two years we’ve seen a change, most notably with the SEC accepting social media as a means to communicate material non-public information. This gave official endorsement to the role of social media as a source of information for asset managers. You may recall the ‘hash crash’ or when Carl Icahn tweeted about his latest investment in Apple, but there have been many more market moving events triggered by disclosures through online media. At the beginning of the year, Blinkx’s stock was hit by a blog post written by a Harvard Professor where he raised serious questions about the company’s revenue reporting and business model. The blog triggered a 40% slide in Blinkx’s share price. Similarly, Expedia’s stock dropped more than 4% also as a result of a blog post. Search Engine Land, a site dedicated to reporting news and information on search engine marketing revealed that Expedia’s website had lost 25% of its search visibility on Google due to paid-link penalties for buying links that helped improve search rankings in contravention of Google’s rules.
Though the value of the web hasn’t been recognised by all asset managers, there is a small group of firms that have started to actively adapt to the new reality, and are using the web to gain competitive advantage. Trailblazers such as Bridgewater, Artemis and Mediolanum Asset Management are among those that are building this valuable resource into their investment process. These firms are using web content for real-time economic modelling, to raise more assets under management, and to make better investment decisions.
Examples such as the ‘hash crash’ or Icahn’s comment relate to short-term gains made possible by being the first to access information published on the web. But this isn’t just a matter of asset managers making a quick buck. Intelligent use of online information can also reveal trends that can inform investments over the longer-term.
Nor is this simply an opportunity for asset managers alone. Traders can get an edge in generating alpha or mitigating risk by being ahead of the market with breaking news. Access to the Twitter firehose can give traders access to information that may not appear on traditional sources immediately. Similarly, portfolio managers can use the web to monitor companies that they hold a stake in or are considering investing in. Data can be mined for the company in question for CEO and employee views, as well as to gain insight on competitors, key partners or subsidiaries to provide the complete due diligence required. On a macro level, being able to identify signals and spot trends would mean investors can anticipate risks in the markets and capitalise on opportunities.
Finally, research analysts can access data on stocks and companies to provide more colour on a company. This can provide supplementary insights that can help an investor rate the loyalty and strength of a company’s customer base and even uncover long-term behavioural trends.
It doesn’t stop there; the technology involved in capturing and disseminating information using the web is constantly evolving. For instance, geo-tagged data can provide unique insights. Check-in data from Foursquare could help project sales for Starbucks, and looking into social media tagging through twitter and Facebook can help gauge customer numbers. Nor is it all about textual information. Images can provide rich and valuable insights. Using facial recognition software and geo-location data could one day mean you could track the whereabouts of CEOs through the photos they upload to social media channels.
There is unlimited potential for advancing how asset managers take advantage of the web. Obviously there’s a place for technology to source this data but you also need the right people behind the screen to yield trusted, actionable, and relevant content. Exploring new ways to access fresh information is an essential step and innovation in this space is set to be revolutionary for the buy side.
Emmett Kilduff is founder & CEO of Eagle Alpha