Quantitative traders, researchers and systematic investors have traditionally mined historical financial data, seeking out repeating patterns around which to build their trading strategies, investment theses and fund portfolios.
PARTNER FEATURE
Quantitative traders, researchers and systematic investors have traditionally mined historical financial data, seeking out repeating patterns around which to build their trading strategies, investment theses and fund portfolios.
But when the coronavirus outbreak triggered an historic market maelstrom in March 2020, many quant funds were seen to be ill-prepared for the fallout, with many systematic managers suffering hefty losses as the sudden and unforeseeable consequences caused by Covid-19 disrupted established market norms.
As many sectors and asset classes have continued to experience seesaw patterns throughout the course of the pandemic, fund strategies that rely on complex models and computer-based algorithms have been periodically wrongfooted by the changeable investment conditions, leaving many in this particular hedge fund sub-sector counting the cost.
In response to this prevailing unpredictability, London-based fintech company SIGTech is putting the concept of ‘nowcasting’ at the core of its data evaluation, curation and analytics platform.
Bin Ren (pictured), the founder and CEO of SIGTech – which spun out from global macro hedge fund Brevan Howard Asset Management in 2019 – says many quant investment strategies have been left floundering in this uncertain market landscape. Nowcasting, he explains, allows for “rapid adaptation” to new environments, while the resulting early-warning signals can also help with risk management.
“Generally speaking, nowcasting is the approach of making direct measurements and short-term predictions of a target variable,” he says of the concept.
Real-world examples of nowcasting outside the financial sector include the early-warning systems for missiles, flooding, earthquakes and tsunamis. In economics, meanwhile, nowcasting is applied to economic indicators whose official measurements typically suffer from long delays and frequent revisions – such as GDP, inflation and economic slack.
It is an opportunity that SIGTech is seizing on with relish. Despite only launching in 2019, the firm’s quant technologies platform – which supports data-driven, rule-based systematic investment processes for global investors – is now being used by a diverse client base whose combined assets total some USD372 billion.
Ren says hedge funds that have access to nowcasting analytics have the ability to gain a “major competitive edge” in both finding alpha and managing risk.
Managers using, for instance, credit and debit card transactions and foot traffic records can better gauge retailers’ profitability well ahead of their earnings statements, while those examining electricity consumption and transportation data can use it to better estimate industrial production.
As the demand for data continues to evolve, and nowcasting lands on more investment managers’ radars, the types of requests and inquiries from clients for specific datasets is rapidly evolving, he explains.
Along with higher-frequency estimates of macroeconomic indicators such as GDP, inflation, labour markets, and industrial production, managers are digging deeper into social media analytics to get a better handle on stock prices, while venue FIX messages are used to determine market liquidity conditions.
Against this backdrop, the growing importance of data potentially heralds far-reaching implications for hedge funds’ spending on technology, systems and data engineers.
“Nowcasting requires an extremely sophisticated tech stack,” Ren continues. “The data pipelines have to handle both market data and alternative data, at higher frequencies – i.e. intraday. The analytics have to be built to scale in the cloud; the right talent is also hard to find. In short, it is far more than what a typical hedge fund has in-house and can afford to build.”
Earlier this year, SIGTech integrated IHS Markit’s Data Lake, a pair-up that offers SIGTech’s quantitative fund manager clients access to over 1,500 proprietary datasets curated by IHS Markit to better inform their investment decisions.
“At SIGTech, we have been upgrading the entire platform firstly to support one-minute bar real-time streaming market data across all major asset classes, and, secondly, to integrate with alternative data vendors to make tens of thousands of datasets available to our clients,” he says.
“In the next 18 months, we’ll gradually release a suite of nowcasting analytics to increase the usage of nowcasting as a valuable tool to our entire target client base that includes hedge funds, asset managers and asset owners.”
