Financial Focus - How Much is Big Data Impacting Your Portfolio?
Big data and data analytics is becoming prevalent in every area of our lives. So, what is it and what does it mean for our portfolios?
Big data is a catch-all term for large data sets that may include unstructured data (think: text, audio or video). More and more companies are using these data sets to analyze and determine trends on which they can base business decisions. Data analytics has been used in mutual fund investing in the past. But as artificial intelligence and systems built to analyze large data sets allow easier access to this type of knowledge, big data may factor into more fund manager decisions.
In general, this isn’t a bad thing. More knowledge should lead to better choices and, in the parlance of the financial world, bigger alpha. An article from Morningstar’s Linda Abu Mushrefova points out that alternative data sources provide unique sets of information and are more up-to-date than published data. However, anyone working with a large set of unstructured data knows that it isn’t all useful information and finding what is useful can be a time consuming and laborious process. Also, being able to analyze a large data set to determine trends and make accurate predictions is a science that takes skill and training. Finally, big data as a tool for managing money has yet to be really tested over a full market cycle.
Part of the problem, as I see it, is the shift from human to machine in analyzing this data. As machines learn more, we entrust them with more work and don’t take the time to really understand all the details of the analysis. Clearly, there is more data than individual humans can go through, so help from a machine makes the process easier and faster. Even so, humans need to review the data, algorithms and the overall analysis to determine appropriateness, and that means active management still has value.
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Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.