In November 1989 Tim Berners-Lee made the first communication between an HTML client and server via what would come to be known as the World Wide Web. In its 25 years, the web has evolved to become the largest interconnected pool of information in history. Certain industries have led the way in taking advantage of the resultant huge business potential. Many customer-facing businesses routinely analyze social media trends to determine customer sentiment, and online-only retailers like Amazon.com systematically harvest users browsing data to tailor their offerings and boost sales.
Yet asset managers who perhaps more than anyone else rely on information to make money have largely undervalued the web as a data source. Part of this stems from concern over the sheer volume of information involved. On average there are 277,000 tweets, 2.46 million Facebook posts and 4 million Google searches every minute of every day. Forget the proverbial haystack trying to find useful and reliable information within this is like trying to find a needle somewhere in the Milky Way. But this is a universal challenge. Where asset managers, as well as the financial sector as a whole, face a particular barrier is the issue of compliance. Strict protocols mean that many firms computers restrict access to social media and online content. In some situations, employees cant even scan the web on their own personal devices.
But opportunity knocks. Over the course of the past two years, we at Eagle Alpha have seen a change, most notably with the Securities and Exchange Commissions acceptance of social media as a means for companies to communicate material nonpublic information. This lent official endorsement to social medias role as a source of information for asset managers. You may recall the so-called hash crash of April 23, when the Dow Jones industrial average dropped 145 points after a Tweet from the Associated Presss Twitter account said there were two explosions at the White House and President Barack Obama had been injured. A hacker from the Syrian Electronic Army later claimed responsibility for the tweet. Theres often a direct positive correlation between Apples price per share and when activist investor Carl Icahn sends tweets about the tech stock.
But there have been many other market-moving events triggered by disclosures through online media. Take for instance, the case of Blinkx, a London- and San Franciscoheadquartered online video advertising network. In January a blog post by Harvard Business School professor Benjamin Edelman raised serious questions about the companys revenue reporting and business model, sending its shares down by more than 30 percent in a single day. Harvard had Edelman disclose his investor relations as a result. The same month, Expedias stock dropped more than 4 percent after Search Engine Land, a site that reports on search engine marketing, revealed that Expedias website had lost 25 percent of its search visibility on Google because of penalties for buying links that helped improve search rankings in contravention of Googles rules.
Though the value of the web hasnt been recognized by all asset managers, there is a small group of firms that has started to actively adapt to the new reality and is harnessing the power of the Internet to gain competitive advantage. Such trailblazers include Westport, Connecticutbased hedge fund firm Bridgewater Associates, Edinburgh, Scotlandheadquartered Artemis Investment Management and Mediolanum Asset Management in Dublin. These firms are using web content for real-time economic modeling, to raise more assets under management and to make better investment decisions.
Examples such as the hash crash or Icahns musings on Apple relate to short-term gains made possible by being the first to access information published online. But this isnt just a matter of asset managers making a quick buck. Intelligent use of information disseminated via blogs or social media can also reveal trends that can inform investments for the long term.
Asset managers arent the only financiers who can, in the parlance of Twitter, jump on the trending topic of social media. Access to the fire hose that is Twitter can give traders access to information that may not appear immediately on traditional news channels. Similarly, portfolio managers can go online to monitor companies in which they hold a stake or are considering investing. Data can be mined for the company in question, for CEO and employee views, as well as to gain insight on competitors, key partners or subsidiaries to provide the complete due diligence required. On a macro level, being able to identify signals and spot trends would mean investors can anticipate risks in the markets and capitalize on opportunities.
Finally, research analysts can access data on stocks and companies to provide more color. This can provide supplementary insights that can help an investor rate the loyalty and strength of a companys customer base and even uncover long-term behavioral trends.
It doesnt stop there. The technology involved in social media never mind the channels themselves is constantly evolving. For instance, geotagged data can provide unique insights. Check-in data from app maker Foursquare, for example, could help project sales figures for Starbucks, and looking into social media tagging on Twitter and Facebook can help gauge customer numbers. Images shared online could be another handy tool. One day, facial recognition software that incorporates geolocation data could give users the ability to track the whereabouts of key industry players, should they (or perhaps someone else) post their photos.
Asset managers have unlimited potential for using social media to collect and analyze data. Obviously, technology gets the information out there. But you also need the right people behind the screen to yield trusted, actionable and relevant content. Exploring new ways to access new media channels is poised to be revolutionary for the buy side.
Emmett Kilduff is the CEO of Dublin-based Eagle Alpha, a financial data firm that analyzes social media.
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