Relevancy and accuracy are not necessarily conjoined twins of reporting or news curation as we have learned over the last month in the U.S. Between calls for only real news to be provided on Facebook to new reports that there may be a liberal bias to Google’s search results – the issue of what is real news and more importantly how do news curators potentially impact the world view has taken center stage. While much of the rhetoric is directed at the general public, financial market participants cannot afford to ignore the themes and possible impacts on their decision making processes.
Hedge funds, and institutional investors are unlikely to use news from Facebook; however, there do remain challenges when using any form of curated news. The core issue for portfolio managers, traders or quantitive firms is the age old garbage in garbage out conundrum. If the news data coming into the decision making pipeline is curated or constrained by an external presentation algorithm (which news is delivered) a firm can be faced with an implicit bias problem. Any implicit bias can immediately negatively impact the ability to make comprehensive trading decisions. The obvious solution to this curation challenge is to insure the firm is acquiring news from diverse or unfiltered sources. A more powerful solution in conjunction with insuring that news is not curated or filtered upstream of the trading lifecycle is to employ a consistent and repeatable quantification algorithm in the post-input, pre-action phase of the investment process. The application of an algorithm which analyzes all news input to the trading lifecycle in a similar fashion with domain specific knowledge accomplishes two goals.
- The algorithm will inherently identify news which may be considered in-accurate for the specific use in trading.
- Consistent, repeatable quantification of news will provide an inherent normalizing factor which can immediately help identify both outlying opportunity and false positives or bias.
The recent headline grabbing focus on what is real news and how is news curated by a variety of platforms has provided a spotlight on a not new occurrence – that the presenters of news can explicitly and implicitly impact perception. This should cause concern and reassessment for investment firms of all sizes, especially hedge funds. They should take action to understand how their upstream providers may implicitly curate or filter news. And strengthen their ability to quantify news in a repeatable, insightful and actionable manner directly upstream from their trading systems. By taking these steps they will mitigate any external bias and increase their ability to generate meaningful alpha from the news.