Globalization is not over. In many ways, it is accelerating, as a new form of internationalization is no longer about goods and services but about data, according to Tony Cowell, partner at KPMG and chairman of the Cayman Alternative Investment Summit.
Unstructured data like satellite imagery or social media data can provide “huge opportunities” for the alternative investment industry, he said on Thursday, at the start of the sixth annual two-day conference, which attracts fund managers, institutional investors, economists and technologists in addition to Cayman’s financial services professionals. Those investment managers who do not use alternative data will face strategic risks in their business, Mr. Cowell said.
“Digitization will become the North Star of our industry,” Mr. Cowell argued in his opening remarks. “The rise of machine learning will really make our industry unrecognizable in the future.” However, funds that use machine learning in their investment process somewhat downplayed the significance of the change, stating that it is merely another form of quantitative value investing that analyzes unstructured data to inform investment decisions.
Michelle McCloskey, president of Man Group, said her firm has been interested in machine learning for 10 years in partnership with Oxford University. But in truth, she said, much of the technological capabilities that Man uses in the investment process are about improving business efficiency rather than generating returns.
Mike Chen, senior portfolio manager and lead machine learning researcher at PanAgora Asset Management, said, “Machine learning is a continuous evolution of what we have been doing for 20 years.” As such, it was neither “new” nor “fancy,” he added. Machine learning was simply linear regression and learning from data to make predictions. These predictions and inferences still come from human intuition and sensibility, he said.
First, an investment thesis is formed traditionally, and then machine learning is applied to analyze big data sets. For instance, given that more than 50 percent of the market capitalization of a company is typically driven by intangibles, such as brand and intellectual property, it would be useful to measure the intangibles, he said. If most of the value of a company is generated by the employees, one investment hypothesis could then be, for example, that higher employee sentiment leads to more revenue per employee and higher stock return.
“And each of these steps can be tested to see that it holds water statistically,” Mr. Chen said. Alternative data providers regularly approach quant funds to sell data that promises, if analyzed correctly, to predict company performance or market behavior. Christine Qi, co-founder and partner at high-frequency trading firm Domeyard LP, said this could be satellite data of WalMart parking lots with the premise that because it approximates the number of customers every day, it would be possible to determine WalMart sales figures before the retailer’s earnings announcement. Or it could be satellite imagery of oil rigs to estimate how much oil is in a specific country.
The problem is that only a handful of firms have been able to leverage this type of data successfully to create excess returns. The reason is, Ms. Qi said, that there is a lot of noise in the data, a lot of inaccuracies that will affect the outcome of the analysis. Because much of the data turns out to be noise, a significant amount of resources are needed to transform the raw data into a usable format. The conference opened with a welcome address from Premier Alden McLaughlin Thursday morning.
The Cayman Alternative Investment Summit continues Friday at the Kimpton Seafire hotel with a range of speaker presentations and panels about the impact of technological change on investment firms. An on-stage interview with Hollywood actress Natalie Portman will close out the conference in the afternoon.