Alpha intel

If a civilian had walked into last week’s Alpha Innovation Required (AIR) Summit in Fort Lauderdale, they may have mistaken proceedings for an intelligence community brainstorming session.

The event organiser, Bill Stephenson, global director of trading strategy for Franklin Templeton Investments, grouped 20 (from a shortlist of 220!) of the most innovative companies to present and discuss ideas on generating alpha in equities trading with the buy-side.

A number of these firms have their roots in intelligence data mining – quite literally farming key risk metrics from vast data sets to sniff out terrorist activity within the US. Two such companies said their client base had only recently switched from being dominated by intelligence organisations (including the Central Intelligence Agency) to investment banks.

Added to this, a keynote address from Citi’s chief information security officer Thomas Harrington, who was instrumental in the US government’s post-September 11 response as a key Federal Bureau of Investigation agent, and eventual associate deputy director, explicitly linked banks’ thinking on cyber security to thinking like the virtual enemies one is trying to repel.

For the buy-side, moderating risk and hunting alpha will increasingly rely on aggregating, mining, modeling and distilling vast data sets of previously unimaginable scope, and in near real-time.

As we’ve seen in consumer web offerings – most notably social media – data has a major role to play in the future of commerce, but the same ideas underpinning the success of Facebook and Twitter will form the basis of asset managers’ investment processes: breaking down disparate information sets upon which to make investment decisions.

On the whole, this is no news to the average buy-sider, but the scale, complexity and usability of the models presented will take most by surprise. 

One such offering was a Google-like search engine that uses historical market data to answer text-based queries like ‘what happened to US retail stocks in December?’ or ‘what effect does a North Korean missile strike have on the energy sector?’. Another, a data aggregation platform, measures business information in minute detail, like individual oil well output for an energy firm, that can be modeled and cast against other metrics to inform a portfolio managers’ decision-making.

What those fortunate enough to travel to Fort Lauderdale witnessed was the immediate future of buy-side capabilities, which harnesses the speed and scale of the internet with the evolving needs of asset managers to better equip themselves to make intelligent decisions in their hunt for alpha.