Modern technology is constantly making our lives more efficient. We now have the ability to hail a cab from our couch, connect instantly with friends and family all over the world, and find the fastest route to our destination based on current traffic patterns. As we utilize technology, abundant data is being created. Collected data points now include everything from how fast cars are traveling on the highway, when restaurants are reaching peak hours, and the status of an airplane engine at any point during a flight. Much of this data was not dreamt about even just five years ago. In fact, more data has been created in the last two years than in the entire history of humanity! And it won’t stop here. The amount of data is now expected to double every two years.
The titans of the technology industry were the first to capitalize on the power this data contained from an advertising perspective; however, investment firms are now trying to harness this data to gain an investment edge. There are several ways that investment firms, from hedge funds to traditional asset managers, are utilizing this information to inform their strategies. As an example, there are managers that use satellite imagery of brick and mortar parking lots to determine if customers are visiting stores. Another is training computers to read free text such as earnings calls transcripts, news articles, and social media posts to determine the investor sentiment of a certain company.
As you can see from those examples, the possibilities are endless for utilizing this new data that is being created every second. So how is BDF capitalizing on this new wave of big data in our investment approach? It all comes down to execution. Yes, the idea of using satellite imagery to know for a fact, rather than rely on a report, how much oil is in a Saudi tanker seems helpful. Indeed it is, but to stay ahead from an investment perspective, this has to be completely unique. If someone else can do that as well, you have lost your edge.
For us, each day, funds we use are firing up their computers to digest mountains of data. Throughout the course of the day, managers such as DFA and AQR are analyzing big data to create more sophisticated approaches to trade execution. If they want to buy or sell a security, in the old days this meant just doing it. However, nowadays, data can help determine patterns in the market to then enter a trade in the most efficient manner. With all this information, which they would not have been able to process with just human power, they are able to determine with precision how to better implement investment ideas. These large investment institutions now rely on big data to help execute for BDF clients.
Technology is becoming a critical component of our daily lives. Although some may say the investment world is behind the technology industry in utilizing big data, this usage will continue to play an increasingly significant role in the investment management industry. In fact, the big data industry grew 12.4% in 2017 to over $150B (International Data Corporation) with financial services comprising an increasing share of that market. With these huge investments, you can see that investment firms will utilize big data and a quantitative approach that will evolve as technology develops. BDF embraces this forward thinking within its approach and will always continue to evaluate the best and most powerful combination of human thought and technology-driven solutions.