THE ALTERNATIVE IMPERATIVE, PART II
By Rick Roche, CAIA, Little Harbor Advisors, LLC
Part 2 of a two-part series on The Alternative Imperative in the COVID Era. In Part 2, the author tackles notorious technology laggards. This piece transitions to alternative data pioneers (Alt-Venturers) and the 4-1-1 on Alt-Data: Hype or Hope? The author dispels the false dichotomy of the “Unattainable Triangle” for human vs. machine intelligence. The author addresses the “vacuum” concept and varied approaches to explore, extend or expand the use of Alt-Data in “legacy” quantitative models and those powered by machine learning algorithms.
Let’s cut to the chase. FinServ firms in general, and asset managers in particular, are laggards. Laggards when it comes to technology adoption and diffusion. No two ways about it – asset managers are near isolates when embracing technological advances. While “laggard” seems like a pejorative term, it is a kinder, gentler descriptor than dinosaur, pre-meteor strike causing Chicxulub crater on the Yucatan Peninsula. The data does not lie. As Chuck Todd of NBC News said “…alternative facts are not facts. They’re falsehoods.”[1]
In a November-2018 worldwide survey of global money managers, a McKinsey & Company report trumpets, “…asset managers generally have remained digital laggards”. In this sobering survey of 300 asset managers, McKinsey & Company found “…roughly 20 firms belong to this select group of asset managers creating digital alpha”.[2] McKinsey is not alone in unveiling certain hard truths about financial firms wed to legacy computing, held back by staid culture and entrenched biases.
Survey after survey sings the same old tune. PricewaterhouseCoopers’ (PwC’s) “Global Data and Analytics Survey” ranked the Asset & Wealth Management industry dead last in using machine learning algorithms for decision-making.[3] There was a 2017 Survey of Financial Services’ CEOs on firms’ openness to embrace a digital finance future. The consulting firm, Gartner Research, found a majority were “…restricted by mental maps that cause executives and strategies to remain within 20th century cultural, business and legal boundaries.[4]
Another Gartner Research note blares, “Digital Disruption Will Force CIOs in Financial Services to Accelerate Digital Transformation”. Gartner predicts that by 2030, “… only 20% of ‘heritage financial firms will flourish and win. Eighty percent will cease to exist, become commoditized or achieve zombie status.”[5] Watch out for that asteroid overhead!
A more recent and (damming) indictment was just released in 4Q 2020 by the ESL ThoughtLab and DataRobot. “Driving ROI Through AI” surveyed 1,200 companies, across 12 industries, 15 countries with combined revenues of $15.5 trillion. Of the twelve industries, “Investment” ranked #11 – barely ahead of “Media” at 12. Their findings state, “The investment sector, which includes private wealth officers, hedge funds, brokers, and other small business, has the fewest (AI) leaders”. [6] These AI investigators claim that most industries are gearing up for the Age of Algorithms” …except for investment and media (industries) – which will stay considerably behind”. [7]