Birgir Haraldsson and Mario Manna, co-founders of Nightberg, an independent macro strategy firm, talk to Profit & Loss about getting noticed in a crowded market and how data analytics is changing the traditional research model.
Profit & Loss: given your experience in the market, how have you seen financial research change over the years?
Mario Manna: Spending a lot of time on the buy side we’ve always been big users of research and it has changed quite a bit, in particular it’s become more siloed. So now you often have specialists carved out to cover a specific niche, firms have a US rates strategist, an EU rates strategist, etc, and so the research becomes narrowly focused and at risk of constantly reporting about a topic or asset when perhaps nothing much is happening.
Also, speaking to some of our clients now, and this goes down to how regulation has changed, they tell us that many of the research pieces they receive are too long and too incumbent with disclaimers. So we think that people instead want something independent and where the provider isn’t trying to sell any other services apart from the research itself.
This is what we saw as an opportunity, to create and publish independent, transparent macro research that’s both easy to read and delivered with substance and style. Sometimes there’s actually not enough emphasis on style, people in the market are very busy and this is a crowded space with so many firms putting out content that you have to get to the heart of what you’re trying to say very quickly and with some sense of style to attract a readership.
P&L: Given that it’s such a crowded space, with so many different and sometimes contradicting research reports being sent out each day, how are consumers of this research supposed to differentiate between the various offerings?
MM: One thing that we’re seeing now is that there are firms beginning to appear in the market that are putting a stamp of approval on a lot of the independent research out there. They collect all the research, filter it based on certain criteria, and then forward certain pieces out and say: “These are the five pieces that we think are exceptional today”. That’s certainly helping.
But ultimately it’s just about the quality of the work, producing good content and insights that firms will find valuable.
P&L: Given that there’s so much more data readily available to market participants now, is it getting harder to spot a unique trade idea?
Birgir Haraldsson: I would say that it’s always been challenging. The thing that’s changed is that in the past there was more opportunity in terms of informational edge. Now it’s less about the information that you have and more about the ability to synthesize that information, to connect the dots between the various pieces of information and then have a disciplined and organized approach for utilizing it within your investment framework.
P&L: Talking about data, you’ve been working with some data analytics firms to produce your research. How can these analytics tools help improve your content?
MM: Big data analytics is just another tool to understand what markets are potentially signaling. Whether or not the reasons for an event are understood, this tool can help identify the probability of certain events happening in a way that you can quantify and see on a dashboard.
BH: One of the firms that we work with is called Predata, a political intelligence firm which has created a methodology for measuring the political volatility of a country by monitoring online conversations taking place on social media platforms across multi-languages.
Again, this information from Predata is another set of information for us to incorporate into our research, it’s a new way of monitoring politically related activity locally and globally that could potentially impact markets in a given country.
Following the Brexit vote we saw the biggest intraday volatility in the history of the pound, and this was driven by a political event. From this we learnt that we are in a new political reality where current political shifts towards an anti-establishment angst have literally been institutionalized. This needs to be taken seriously. But then the question becomes: what practical processes are you going to put in place as you think about this type of risk in a portfolio?
To us, Predata’s information is a new tool that enables us to actually start quantifying the politics of a country as a risk parameter. Before you would listen to the news and what senior politicians were saying, but this is a way to gauge what the population itself is indicating and helps to measure in which direction political views within that country could be headed.
P&L: But couldn’t this type of analytics produce anomalous results? Statistically speaking, in somewhere like Britain speaking younger people use social more yet older people tend to have a higher voter turnout.
BH: This data is just an indicator, by itself it isn’t necessarily enough to draw all the conclusions from. In the beginning, you need to have a particular hypothesis about what information you’re trying to capture and have specific questions in mind. Then you have to look at what social media sources can capture enough depth and width of information to answer those questions and ultimately curate them in the right way for a reliable signal on your hypothesis.
P&L: Do you see the role of big data growing at the expense of traditional economists or strategists?
BH: The use of big data analytics will definitely grow, but I don’t believe that it will make the discretionary side of the research business obsolete. Yes, there may be more quantitative research strategies coming to market that are just based on signals but I don’t think that this kills the discretionary component because there are always unknown variables in future events that require speculation. Some purely based quant firms are using us for that as an example.
P&L: Do you think it’s getting harder to predict market moves? For example, Bernanke’s comments a few years ago set off the infamous “Taper Tantrum” but now the markets move much less following central bank announcements….
BH: It’s important to distinguish whether a particular event signals that we’re entering into a new monetary policy regime, or entering into a new economic reality, or whether it signals a marginal shift within a widely understood and even a maturing regime. The latter will not have the same shock factor as the former and I think that’s what’s been happening to a degree lately.
But in terms of predicting market moves, what we’re aiming to do in our research is to find the three or four systemic moves per year – something that truly moves portfolios – rather than the trade of the week, or the trade of the next few weeks.
MM: Just on that, working in the hedge fund world I learnt that the truly big returns only happen a few times per year. So what we’re aiming to do is to capture the incremental changes that may cause people to be anchored to outdated analysis as new market cycles emerge. This we do by looking at what the data is saying, by what the price action is saying, by being objective and willing to change our own views when necessary, and through this incremental process indicate where the big market moves might take place.