Weekly Briefing No. 46 | Is ‘New Data’ the Best Hope for Hedge Funds?

Is ‘New Data’ the answer to hedge funds’ woes? We explore that question as well as Gen Z’s impact on financial institutions and why the SEC should regulate pharmacy benefit managers. Payments news from Facebook and Apple, the rise of usage-based insurance, Ellevest’s financing and John Stumpf’s mea culpa tour hit our radar this week. Finally, we take note of TradeWind Markets and a new career chapter for Citi fintech guru Jorge Ruiz.

IN DEPTH

Is ‘New Data’ the best hope for hedge funds?

“Hyman Roth is the only one left, because he always made money for his partners.”  That famous description of Lee Strasberg’s character in The Godfather II came to mind upon reading this piece in ValueWalk. Borrowing heavily from a letter scribed by Eric Peters of One River Asset Management, the article says the so-called golden age of information advantage has passed Wall Street by. Today, that’s not a groundbreaking view, especially in light of continued dismal hedge fund performance in 1H 2016, but it nonetheless got us asking the question: What would Hyman Roth do if he were managing a standard long-short fund in 2H 2016, facing another year of underperformance? Sure, he could cut his management fees. But that would just buy him a little time and goodwill. Roth would take more dramatic action — and recent fintech news flow would provide his wily brain with ample ideas. He might cut a deal with Quandl, which just raised another $12 million, to expand coverage of alternative data sets that are typically beyond the scope of asset managers. He could try to get his hooks into Japanese fintech start-up Nowcast, which will soon be using University of Tokyo IP to analyze millions of retail transactions in an effort to better forecast earnings. Alternatively, if he were running a global macro fund, he could undertake the brain pain necessary to understand prediction market start-ups such as Augur and Gnosis, which are seeking to marry the wisdom of the crowds with the Ethereum protocol. To be sure, any fintech that’s offering a bottle of alpha under its trenchcoat is to be avoided like the plague. However, ‘New Data’ streams can provide fresh building blocks for analysis that can be turned into actionable investment insights. But for every fund looking into ‘New Data’ there are several more still trying to produce alpha the old fashioned way, clinging to the hope that the same old, same old will start working again. Now that’s a trade Roth would never put on.

Hurricane Z is about to hit.

In the last several years, a ton of ink has been spilled analyzing the habits of millennials and their loyalty (or lack thereof) to incumbent financial institutions. With this generation set to inherit a whopping $30 trillion, expect to see even more white papers, headlines and studies on their habits. But we think some of this fascination is misplaced for two reasons: 1) Millennials are getting old and, therefore, set in their ways. In fact, in just 15 years, the oldest millennials will be turning 50 and can qualify to become AARP members; and 2) Generation Z, an even bigger generation, is about to come of age, with the oldest part of the cohort turning 21 this year. By its nature, labeling a generation with a hard cut-off date is misleading, but still, as Eva del Rio of HR Box points out in a recent opinion piece, whereas millennials have been criticized for lacking focus, the next generation tends to be hyper-focused on career and financial stability.  If that trend continues and today’s teenagers develop into frugal, financially conservative young adults who love technology and hate brands, that will matter to asset gatherers and other financial institutions. For more on the Gen Zers, check out this Fast Company article.

Should the SEC regulate drug sales?

Nobody is advocating that, but after reading this article on how pharmaceutical benefit managers (PBWs) keep drug payers (insurers and corporations) as well as drug sellers (pharmacies) in the dark about how much of a spread they make as intermediaries, we concluded that stock exchanges look downright boring. Sure, there are misbehaving brokers and traders in financial markets, but the SEC has a number of rules in place that govern price transparency, spreads and commissions that can be charged to customers. When it comes to drugs, though, opacity still seems to be the name of the game. Hopefully, fintech and health care IT companies, aided by some new rules and technologies, can bring more transparency to drug prices in the future. Otherwise, traders may want to see if they can get jobs at companies like Express Scripts, because that’s where the big spreads can be found.

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IN BRIEF

Facebook employs 2x more bots than humans. Facebook messaging head David Marcus announced last week that developers soon will get tools to enable its bots to accept native payments via stored credit card information. By nearly doubling the number of bots to 33,000 (up from 18,000 in July), the company’s ‘botcount’ will now vastly exceed its 15,000 person headcount.

And speaking of big tech and payments… Circle, a peer-to-peer payments company, is integrating with Apple’s iMessage. As a result, iMessage users will be able to send fiat currencies and Bitcoin to each other via text. But there’s more to the story here, as Circle isn’t just another payments start-up. The Dublin-based company has raised a total of $136 million from firms including IDG China, Goldman Sachs, Accel and angels Glenn Hutchins and Sam Palmisano. As such, we suspect Apple may treat Circle with a bit more ‘Apple Care’ than it’s treated other digital currency apps.

Progressive talks usage-based insurance. This kind of insurance, also known as UBI and pay-as-you-drive, seems poised to grow given advancements in telematics, Big Data, mobile and other innovations. Dave Pratt, the head of Progressive’s UBI division, offered his views to Insurance Networking News in conjunction with the company’s new partnership with Generali Group. Among the interesting insights: auto fatalities have increased 7.2% in 2015 vs. 2014, most likely due to distracted driving.  Check the interview here.

Ellevest bags an additional $9 million. Ripple and GreenSky raised more money last week, but those deals didn’t catch our eye. Instead, we’re noting the ‘modest’ $9 million raised by Ellevest, a roboadvisor targeting women. The company, founded by Sallie Krawcheck and Charlie Kroll, took in capital from the likes of Aspect Ventures, Ulu Ventures, Menlo Ventures, tennis star Venus Williams and Mellody Hobson. But given the huge opportunity that exists in female financial services, we’re wondering why the company didn’t raise a bigger round.

Wells Fargo is main dish at upcoming Congressional cook-out.  Jim Cramer did a great job grilling Wells Fargo’s CEO, John Stumpf on the scandal enveloping Wells. For most of the interview, Stumpf did okay, but when you run the Dallas Cowboys of banking, ‘okay’ doesn’t suffice. And when Stumpf asserted that his pay wasn’t tied to product sales goals, we were surprised. Of course his comp isn’t directly tied to sales, but Stumpf owns nearly 1.6 million shares of stock and equivalents. Those holdings have risen in part from the overheated cross-selling culture that Stumpf pushed. As he heads to Congress for the mother of all grillings, Stumpf may want to be careful about trying to absolve himself from culpability. Warren Buffett will probably be watching, and if you’re involved in digital banking, you may want to tune in as well.  

Company of note: TradeWind Markets.

A spin-off of newbie exchange IEX, TradeWind is aiming to revolutionize gold trading through a blockchain system that will eliminate the need for third-party intermediation. Since its spinoff, the company has raised $9 million from investors including bullion specialist Sprott. However, if the company is going to challenge the London Bullion Market Association and the London Metal Exchange, it will need to raise a lot more capital. Read more about the company here.

Comings and goings.

Jorge Ruiz is leaving his post as head of Citi’s fintech acceleration efforts, where he led aspects of the bank’s Latin American business and became known as a master manager of large technology integrations. In his new venture, above & beyond, he will help financial institutions seeking to transform themselves into what he refers to as ‘exponential businesses.’

Quote of the week.

“Success is having to worry about every damn thing in the world, except money.”

~ Johnny Cash