Challenges for the buy side were the focus of the Friday morning keynote at the WBR Equities Leaders Summit.
The broad question up for discussion was how will traditionally active managers need to adapt their investment strategies as automated technologies continue to play a larger role in the trading life cycle. The conversation focused on alternative, or unstructured data.
While the topic was narrow, the discussion proved to be a broad window into the institutional buy side’s approach to new methods and technologies. Large money managers are known for conservatism and not being first movers, and their gradual movement into alt data is representative of how this in their DNA.
BMO Global Asset Management is looking to improve how it taps into its own data, and also bring in more alternative data from the outside. But the $260 billion asset manager is not dozens of data scientists and throwing money at the initiative, as the return on investment is unclear.
“That’s not the way we operate,” said Ernesto Ramos, Managing Director and Head of Equities at BMO. “We tend to be incrementalists and gradualists.”
BMO has been doing quantitative investing since 1985, but uptake has been gradual. “We don’t say ‘let’s forget this way of doing things and bring in this new way of doing things’,” Ramos said.
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Ramos defined alternative data as data that’s not on financial statements and not generated by exchange trading -- for example, data on the trasnaportation of shipping containers.
“The challenge is, how do you process this? It’s almost impossible to go at this in any human interactive form,” Ramos said. Natural language processing and algorithms can be used, but there are still questions about how that would work.
Another challenge is that alt data is best in short-term trading situations, and BMO’s holding period is more like one to two years on average. “It’s tougher for us to take advantage of short-term signals,” Ramos said.
BMO is in the “exploratory” stage regarding alt data, Ramos said. The firm will likely tap third parties as it moves forward, as it doesn’t plan to add the expertise in-house.
For firms that are expanding their alt-data usage, it’s worth noting that the U.S. Securities and Exchange Commission is looking more closely at vendor management and oversight, which would extend to how data is procured. That’s according to Tyler Gellasch, Executive Director of the Healthy Markets Association.
“If certain information is valuable to you, it is valuable to others,” Gellasch said. “How do you get it? As you go through alternative data sources, you should be thinking about that.”
