Heinrich Merz, the deputy CIO of the Permal Group, has offered the world his thoughts on the (eventual) impact of Big Data on hedge fund investing, in an essay in the latest issue of the AIMA Journal.
I’ll say something about his thoughts, but I hope that at this time of year I may be forgiven some free association, both backward and forward, in the name of the god, Janus, always mentioned in this context. The promise of Big Data is that it will take the burden of forecasting the future off of the shoulders of humans, who have been notoriously bad at it. Machines running algorithms will process complicated data in unprecedented ways and will tell us where we are going in time for the proprietors of the algorithms to make money off of them.
Unfortunately we as a species haven’t been especially good at predicting the future of Big Data itself. The schedule at which the great new crystal balls will come into our lives keeps getting pushed back.
I said just now that Merz speaks of the “eventual” impact because Merz acknowledges a point I have noted here in the recent past, that Big Data is thus far a dog that has not barked, that has at most growled. As Merz puts it, both “survey data and anecdotal example” suggest that hedge fund managers have thus far been largely shielded from the consequences of the Big Data shake-up that has hit many other industries in “the world around us.”
It doesn’t follow of course that the dog in question won’t bark – and bark furiously – in the year ahead. But predictions ought to be chastened.
Distant Colonies or Flat Screen TVs
I am reminded of my childhood in the late 1960s and early 1970s, the era of Alvin Toffler’s book, Future Shock, of the invention of the term “futurology,” and of the exciting Apollo missions to the moon.
Discussions of what the early 21st century would be like were fairly common at that moment. Most of them involved the creation of colonies on Mars or at the bottom of the sea. If I remember correctly, the basic idea was that life would be a lot like it was in the middle of the 20th century, only it would take place in distant and newly tamed places.
A few more earthbound prognosticators predicted around this time that television sets would become so flat that “you’ll be able to hang them on your wall like a painting.” But that proposed future earned scorn. “Where will the vacuum tubes go, then” was the devastating retort.
My point is simply that the future is never a simple extrapolation from the more eye-catching developments of the present. Any real future takes twists and turns. Thus, the government that proved that it could put men on the moon and bring them back did so …and then closed down the program. Advances in that direction halted for a generation or more, while market demand helped generate those flat screen televisions.
Some discussions of the near-future of Big Data have been suspiciously enthusiastic. Last year, for example, we reported on the views of Paul Rowady of the TABB Group. Rowady said that solution providers were at that moment “on the verge of having most, if not all, of the raw material they need to achieve a groundbreaking uptick in clarity about the event horizon for purposes like volatility estimation and risk analytics.”
Compared to that, Merz’ expectations from Big Data seem in a sense refreshingly modest. Stock analysts looking at a specific corporation will, he says, soon have the tools to accurately estimate that firm’s asset stability with much greater accuracy than at present.
Yes, that seems reasonable: The better the Data, the better the simulations of various scenarios, and the more accurate the stress testing. That seems more like a flat-screen television than a Martian colony.