Event: BYOB Interview with our Director Filippo Lanza. Alternative Data and ESG

This interview was carried out and written by Patrick Whyte. Head of Business Development at BYOB. Here is the link to the full interview

Nice and quick indeed. Right, let’s change things up a little this week. Let’s start by hearing how you got into investing.

I started investing my parents' money when I was at university in Milan, and I have loved investing ever since. Over the years I’ve become increasingly fascinated with the role of technology in investing and how it can help us scan, monitor and digest the ever-growing data universe more efficiently and effectively. At the same time, I love to find new ways to leverage technology to control our natural biases and learn better from our past mistakes. The winning teams of the future will rely on a rich and balanced combination of human and artificial intelligence.

Your love for technology is reflected in your recent work with the alt-data software company, Knowsis, what do you believe alternative data can provide to the industry?

The demand for data has increased massively over the last 10 years and with it the need to have adaptive tools that can provide real-time feedback in a compliance-secured environment and with the ability to transform data into actionable insights. With Knowsis we want to bridge the gap between the web and capital markets extracting the multitude of hidden quality information that is produced on the web every day. Knowsis is very much a process rather than a technology itself, we are starting to work on Sentiment Extraction from Social Media, News Headline and developed a brand new Alert System that spots social anomalies, volume spikes and notifies the user in real-time. The main addition that we see is real-time feedback and breaking the barrier of paying data that cannot be stored and processed. We constantly work on bringing the highest level of disruption to the Alt Data world and provide actionable solutions for businesses and capital markets.

What alt-data do you recommend to investment professionals and why?

Alternative data includes a huge variety of sources. The methods used for extraction are pretty much standardised across the industry, what changes is whether the data can help you make a better decision or change your mind. Social media sentiment data has proven to be something that the big money needs as a risk alert tool and the Meme stock saga has proven that. What people think about companies matter, GameStop has proven it and the next years to come will demonstrate it with the advent of ESG Investing.

Well, as you’ve mentioned GameStop, what impact do you believe social media will have on investing?

The GameStop drama provided a spotlight on the power of social media sentiment and the role it has for any investor needing to anticipate social anomalies such as the Meme Stock Mania. More importantly though, we’ve seen the rise of retail investors and how they’re using social media to make decisions. The numbers were already trending in that direction, but the pandemic has accelerated retail participation in the stock market. Just to give you some numbers: in the US, households own 36% of the $57 trillion US Equity market whereas Hedge Funds own only 3%. This means that the so-called “retail” is 12 times more important than the so-called “smart money”. Prior to 2020 retail activity (single stock and option) stayed flat for 20 years. 5 out of the 10 largest call option volumes in history happened in 2021!

We’ve previously spoken about the importance of ESG but the lack of data that has been identified as a shortcoming, what do you believe is needed to make informed ESG investment decisions?

Massive topic. ESG has been in the background for about 10 years now, but recently it looks like everyone wants to push the green button and make “sustainable cash”. The shortcoming is indeed around the quality and quantity of the data available. Briefly, ESG data presents three issues: it’s presented annually, big providers disagree between them, there is no real-time feedback. But as always opportunities arise from chaos. I think that beyond your ESG analysis process, it would be very useful to have a risk-alert system that is able to monitor the ESG behaviour of your portfolio. Knowsis is working on a solution for that, processing 24/7 ESG sources, corporate documents and tweets/news and extracting granular E/S/G sentiment that can be accessed through our API or Dashboard.

How do you see the role of ESG evolving in the industry?

I think the amount of cash that has flowed into ESG investing has already made it a prominent market trend. The main question is whether ESG will become another market theme detached from the real economy or something that could benefit the whole world. The pandemic has made it evident that we need to make a common effort to live in a better world for the years to come. Investors are looking for returns but also want to avoid the tail-risk related to corporate malpractices.

How are you currently using ESG and alt-data at Numen Capital?

As I said before, you need to start from the assumption that ESG data is processed data given that raw data is pretty much non-existent given their lack of transparency and frequency. So we use ML and NLP to extract ESG sentiment from official documents, research but more interestingly we are using a lot of social media ESG, which sounds scary to people in terms of reliability and granularity but we really think there is something in there, whether that is alpha is an interesting question. But it surely gives incredible results as a risk alert system.

Finally, to finish things off, what 3 words would best describe the industry trends you expect to see over the next 12 months?

If you’re referring to the financial markets I’d say: Debt imbalances, Tech Winter and Energy Transition

If you’re referring to alternative data I’d say: ESG, Sentiment data and Knowsis (of course)

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