Our exploration of the use of modern data analytics to enhance investment results continues this week with two of the leading providers of tools for portfolio managers. 

My guests on today’s show are Clare Flynn Levy and Cameron Hight, both former investment managers who became entrepreneurs seeking to improve outcomes for other managers. Clare is the founder and CEO of Essentia Analytics, a behavioral data analytics service that enables fund managers to capture rich data about their own behavior and its context. Essentia analyzes trading history to help managers overcome common behavioral biases and optimize their trade entry and exit on positions. 

Cameron is the Founder and CEO of Alpha Theory, a fintech company that helps investment managers optimize their position sizing process.  By creating a disciplined, real-time process based on a decision algorithm with roots in actuarial science, physics, and poker, Alpha Theory takes the guessing out of position sizing and allows managers to focus on what they do best - picking stocks. 

Our conversations cover the founding of their respective businesses, the mistakes portfolio managers commonly make, the tools they employ to help managers improve, and the challenges they face in broader adoption of these modern tools.  The good news is the clients of Essentia and Alpha Theory have demonstrated improvement in their results after employing these techniques.  If you ask Clare and Cameron, you may come a whole new appreciation about the potential for active management going forward. 

You can learn more about these two innovative companies at essentia-analytics.com and alphatheory.com.

 

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Show Notes

Clare (2:26)

2:29 – Clare’s path to founding Essentia 

5:42 – What makes data science of investing revolutionary in the past five years 

6:25 – The pitch for Essentia’s tools 

7:57 – How do you use data to get into the behaviors that work and the ones that don’t

            8:06 – Michael Mauboussin podcast episode

            8:10 – Annie Duke podcast episode 

11:03 – Specific tenants of behavioral finance 

12:39 – Parts of the portfolio process that they explore 

14:20 – How do you actually convince people to change behavior 

16:17 – The nudges built into the system 

21:26 – How much data is needed to be able to help improve performance 

22:16 – Most interesting data set that a portfolio manager has tried to get to improve their performance 

24:21 – Is there consistency in people’s patterns 

27:08 -  The hardest part of convincing someone to become a client 

29:16 – What other places does Essentia plan on expanding 

30:42 – Given all of the data that Clare has seen, what’s her outlook on active management

32:39 - Closing questions for Clare 

Cameron (37:58)

38:02 – Cameron’s background and the founding of Alpha Theory 

38:35 – What problems does Alpha Theory looks to solve

            38:49 – Psychology of Intelligence Analysis (Richard Shure) 

40:13 – The mistakes he sees portfolio managers make 

42:29 – What tool does Alpha theory is provide to portfolio managers 

44:17 – What changes in the portfolio manager’s implementation 

47:27 – What have been the outcomes when people implement Alpha Theory 

51:58 -  Are there different firms or type of firms that are better at picking stocks 

56:36 - The Concentration Manifesto 

1:00:25 – How they calculate batting average of allocators

1:01:41 – Where else could this tool be applied

1:03:31 – What questions should allocators be asking of managers

1:05:09 – How much does the input of information impact the outcome

1:06:42 – What other research has Cameron been able to do based on this data

1:08:56 – Biggest challenge in running this business

 

1:11:23 – Closing questions for Cameron