Future of investing

• In the old days, any PM was able to hang a shingle and have a decent chance of success; now larger investments are needed for firms to be successful - larger, established players are at an advantage

• At the same time talent and resources in the market are much richer than they were just a few years ago; even a small player can cobble together competitive capabilities - but they need to think like a product manager rather than just an investor / quant / CFO

• Larger firms are also shifting from having siloed teams to having more of a systems approach

• Diversity has historically been seen as a nice-to-have, but is now often thought of as absolutely essential to maintaining edge

Limits of alt data

• In talking about data science everyone likes to discuss the end-state - few really go in the weeds on how to take the first steps in incorporating a more systematic thought process in traditional investing

• Though there are certainly exceptions, at most firms there is a culture gap between data scientists and traditional investors; unfortunately close collaboration is necessary for a data effort to be successful

• Confirmation bias is very common among investors just beginning to use data

Role of diversity

• Diversity of thought comes down to identifying blind spots; both fundamental analysts and technical specialists have a lot to teach each other

• Highlights from relevant literature:

  • According to Alex Pentland's Social Physics, a tight-knit network tends to become an echo chamber; adding an unconnected node adds information while connected nodes add more of the same

  • Diverse groups tend to generate more thoughtful and more accurate conclusions; this has been observed specifically with juries (source)

  • Promoting one kind of diversity makes organisations more welcoming of diversity of thought in general; for example, more racially diverse groups exhibit less sexism (source)

Getting credit

• It can be difficult to course-correct once technical hires have been made - so need to try and figure out how to onboard, integrate, and ultimately assess them from the get-go

• The cultural shift necessary for successful integration of technical hires into discretionary investment firms needs to be driven from the top; management has to make a commitment not only to back an initial launch but also to stick with it through the inevitable trial and error

• Data scientists within discretionary funds seldom have a clear P&L impact, but there are multiple other ways to quantify the value being created - for example you can look at:

  • How many projects have been executed

  • How often each project gets accessed

  • How many "repeat customers" each data scientist has

• To keep data scientists and quants from being seen as outsiders, it is helpful to have them sit alongside analysts; it's also good to have dual reporting, both to data leads and PMs

On talent

• Silicon Valley talent tends to be put up on a pedestal but is often a less than ideal fit for asset management; cultural differences aside, they tend to want to work on products

• Understanding motivations is key to identifying great talent; look for people who want a challenge - the signal to noise ratio is lower in investing than in other fields

• Don't overhire; building out a team of rockstars will inevitably lead to discontent as some of them will end up having to do work that doesn't begin to challenge them

• When onboarding novel resources, you can't just plop them in the way you would a banker from Goldman or a devops hire; management needs to prioritise cross-team integration, and in some cases this may necessitate making incremental investments in HR

• Anticipating a culture clash can be a self-fulfilling prophecy; for example, establishing a permanent translation layer between data scientists and fundamental analysts often limits direct communication instead of improving it

Blind spots

• Identifying blind spots often just comes down to company culture; some firms are more welcoming of change, others less so - and it is important to be honest about where you stand

• Instead of initially focusing on shortcomings, in internal messaging around new initiatives firms should focus on opportunities for growth

• The whole point of having a culture welcoming of diversity is to make it easier to identify and address blind spots