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The big data revolution in active management

This week, the Financial Times reported that BlackRock was setting up a new lab in Silicon Valley, specialising in artificial intelligence.

  • Asset managers are increasingly embracing big data to provide additional insight
  • Companies that can’t get to grips with big data risk losing their edge.
  • Is there a danger the insights are arbitraged away if everyone looks at the same data?

BlackRock already has a range of funds based on technological insights, designed to rival ‘smart beta’ products. Schroders has its well-established ‘Data Insights’ team, while BNY Mellon has also been active in harnessing big data for investment insight. It may be an important part of how active management prepares itself for the future.

A recent report from Barclays shows that fund groups are now making greater use of big data – footfall, geolocation data, social media feeds, credit card reports – than they are of economic insight. It is easy to see why: understanding the footfall for, say, Next, is a far more productive way to track its prospects than looking at UK inflation.

It may become a necessity. There has been a vast increase in computer process power, storage capacity and information, which in turn has created huge amounts of data. Research group IDC predicts a ten-fold increase in worldwide data by 2025. Fund management is all about effective use of information to glean a competitive advantage. Companies that can’t get to grips with big data risk losing their edge.

Of course, there are ways to get this information other than building a vast internal data centre. There are specialist research groups. However, it may be that smaller fund groups are at a disadvantage as this phenomenon grows.Another question is whether the advantage ultimately be arbitraged away as more investors look at the same data? After all, the data needs curating by investors, and group-think may creep in as everyone interrogates the same data to uncover the same research. The big data advantage may disappear. It may simply lead to greater market efficiency. Schroders believes not, saying it will create hard-to access “realms” for long-term alpha generation.

The value in harnessing big data may not become apparent for some time. The companies at the vanguard of this approach have only been doing it for 2-3 years. It is also difficult to isolate the impact of an individual insight on the performance of a stock. However, it may well be that this type of insight is just what the active fund management industry needs to equip itself for the next generation.

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