Asset managers see value in alternative data in its rawer forms, but most won’t touch it
Regulatory vagueness reaches new heights as incomplete rules take effect
The wider use of CCPs is not a systemic threat – but participants do face hard-to-measure risks
COMMENTARY: Privacy fears in public places
A decade ago, Facebook founder Mark Zuckerberg was confidently predicting the end of a “social norm” of privacy – the growth of social media, he asserted, would inevitably mean growing comfort with sharing increasingly personal information online. His prediction hasn’t exactly been borne out. He and his company are now at the centre of multiple scandals over misuse of personal information for commercial and political ends, and privacy is high on the agenda for governments as well as private industry.
Asset managers find themselves in the same cleft stick as Zuckerberg: advances in big data technology make it possible to reap unprecedented profits from the detailed processing of large amounts of personal information, but the customers who give up the information remain stubbornly nervous about where it ends up. And, increasingly, governments are on their side, with the EU’s General Data Protection Regulation now provoking a copycat law in California that could become a de facto national standard for the US. Data privacy is, and will remain, a major policy issue and a major operational risk.
This is painful news for funds hoping to profit from analysis of this so-called ‘alternative data’. Possible technical solutions include homomorphic encryption, which allows analysis of a dataset while concealing the information within it, and differential privacy, which adds statistical noise to the dataset to prevent individual-level analysis. Fund managers are hopeful about both, although the techniques are still limited in the types of analysis they permit.
But the underlying problem is the same as that confronting Facebook: the monetary incentives are pointing the wrong way. Alternative data has tremendous potential value to the investor, the advertiser, the marketer – and the political operator. As long as this remains the case, the unscrupulous will try to make that value real, whatever the law says (and pocket as much of it as they can). Regulations and penalties may shift the gradient of this downhill slope but they cannot reverse it.
STAT OF THE WEEK
Goldman Sachs put aside $224 million of provisions for credit losses in the first quarter of the year, as the bank’s consumer portfolio continues to expand. The total was just $44 million for the same quarter last year, but has surged as the investment banking giant has pivoted to traditional lending.
QUOTE OF THE WEEK
“Defaults will happen again. Whether they will increase in frequency across the globe because of the slowing economy or geopolitical tensions, I’m not so sure. Central counterparties and market infrastructure operators just need to be prepared” – Roland Chai, HKEX