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Spooked by Scandals, Asset Management Tries to Self-Police
Having witnessed the Cambridge Analytica-Facebook disaster, managers are drafting data standards to avoid one of their own.
Asset managers are getting behind a new set of voluntary best practices in using data that includes personally identifiable information, or PII.
The Investment Data Standards Organization, formed in January, includes data vendors and users, such as hedge funds. It has published a set of standards that it views as a work-in-progress, meant to govern and adapt to the fund industry’s early and exploding use of alternative data.
For active asset managers, data analysis is one of the most promising areas to derive new investment insights.
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If the industry doesn’t police itself, regulators may. Cambridge Analytica’s use of personal information from Facebook users to influence the 2016 presidential election has raised alarm bells and asset managers want to avoid any blowback. In Europe, managers also will need to adhere to new privacy regulations in the General Data Protection Regulation, which becomes effective May 25.
Unlike in marketing and advertising, Personally identifiable information does not help fund managers spot sector and market shifts, according to Gene Ekster, a co-founder of Alternative Data Group, which assists investment firms with integrating these new information sources. Instead, managers tend to use aggregated, anonymous data that can provide insights.
Ekster said it’s important that the industry takes steps to make sure that PII data are not part of the analysis. The standards are designed to ensure PII does not slip through. The 37-page standards cover operating procedures for the identification, anonymization, and remediation of PII as well as risk management, education, and training for staffers.
Amir Leitersdorf, co-founder of Tel Aviv-based hedge fund Super Signal Capital, said the standards will streamline vendors relationships by outlining requirements that most asset managers want in place. For example, no one wants exclusive access to data that could attract regulators.
“We know how dangerous it is, and we do everything to avoid it,” Leitersdorf said. “No hedge fund cares about PII. And a lack of standards makes our job more difficult. This is why we support this effort.” Super Signal’s investment process, which was founded at the end of last year, will rely solely on alternative data.
Chris Petrescu, former data strategist at WorldQuant who, according to Bloomberg, will be joining Balyasny in the fall as director of quant data sourcing and strategy, said the standards help establish best practices. “They’re something to fall back on when regulators come by. We can say, ‘here are the standards we put together to police ourselves.’” Petrescu pointed out that four years ago hedge funds wouldn’t have formed a group to jointly address shared issues. At the time, hedge funds’ edge was that they had a team finding data first. Now vendors have popped up and aggregate data for the market.
“The next edge is being at a fund that can process the data better and combine these alt data sets,” he said. “It’s much more collaborative now.”