Hedge fund managers and other investors will tell you that knowledge is power. Having data that others don’t have serves as a leg up on the competition. Spotting trends in data tells them where to place their bets. This is why investment firms employ scores of data scientists to pore over data to provide the right direction.
While I have written extensively on how the COVID-19 pandemic has affected many aspects of the payments and banking world, investing is an area, quite frankly, I hadn’t thought about. So, I was very interested to read an article in Business Insider this morning that discussed how investment firms and hedge funds use payments data to inform their investment decisions.
In this article, Credit-card data is broken. Here’s how hedge funds and banks are trying to retool one of the original alt-data trades, the authors discuss how card spend data is used to inform their decisions on all kinds of stocks. These data provide insights on issuers, payment networks, and many consumer facing companies.
Unfortunately, the pandemic has screwed everything up. Consumer spending patterns have significantly changed and, what was once fairly predictable, has been completely turned on its ear. Examples from the article include:
Spending on board games and web cameras, which saw explosive growth in the spring, is likely unsustainable and only temporary, Kuznetsova said. A hedge fund that specializes in video games has soared this year, partially thanks to people turning to new games while stuck at home.
Other shifts, however, are more nuanced.
For instance, Kuznetsova said there were huge increases in the size of purchases per customer at quick-service restaurants even as the overall number of visits decreased.
The shift, she said, was likely due to a single member of the household buying meals for everyone as opposed to each person getting their own. In reality, people’s spending habits weren’t necessarily changing, but credit-card data made it appear as if one person had tripled his or her spending.
These types of changes wreak havoc on the algorithms that many of these firms depend on for guidance. In fact, the article mentions a hedge fund that was so reliant on its data for direction that it had to pull a $350 million out of the market for fear that pandemic related charges will cause the algorithms to produce spurious data.
To combat the effect of these changes in consumer behavior, the quants have started introducing new data and new techniques to the data to try to make sense of what the data are telling them.
“Depending on what criteria, what indicator you use for your investment decisions, you risk making a very wrong decision unless you combine several different factors and understand what is real is happening in this sector,” Kuznetsova said.”This is the difference between using multiple sources of data and looking at the complexity, trying to track and understand what happens, as opposed to automating all the predictive analysis.”
I think what I found so thought-provoking about this article is how this pandemic reaches into so many different aspects of the economy. Both the general media and the financial media have beaten to death many of the different ways the pandemic has messed things up, and now we found out about an entire sector that has had to retool its business models, quite literally, in order to stay on top of the chaos and confusion brought on by the virus.
Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group