A Goldman Sachs MD says the alt-data explosion is creating FOMO that could lead traders to look for investment signs in things like lunar cycles and how wide your face is

• The growth of the alternative-data market has made it possible to get data on everything from the location of every metallic grate in Washington, D.C., to the number of items lost but not claimed on the New York City subway system.
• This nearly endless universe of information has led data scientists to make some interesting connections.
• Matthew Rothman, a managing director at Goldman Sachs, highlighted some of the unlikely correlations to performance that have been found through academic research while speaking at an alternative data conference on Thursday in New York.
• Examples included the width of a hedge fund managers' face being tied to how risky they are, and full moons leading to more volatile markets.
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Face widths, lunar cycles, and solar flares could all hold the secret to hedge fund managers' returns.

It might sound crazy, but the rise of alternative-data has enabled data scientists to find some compelling, albeit bizarre, correlations that could have applications to the financial markets.

On paper it might seem preposterous to connect the pitch of a male CEO's voice to their level of risk aversion (Studies have: the lower the voice, the riskier they are.)

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But Matthew Rothman, managing director at Goldman Sachs, said that as it gets harder to find an investing edge, firms might be more tempted to look at non-traditional correlations - if the data is available.

"It's the fear of missing out versus the fear of over-fitting," Rothman said. "Which ones scare you more? Right. And there's no right answer to that. It's really, 'Are you willing to take the risk of investing on bull----?'"

Rothman, who spoke at an alternative data conference in New York on Thursday, wasn't in support of or against creating investing signals based on these kinds of non-traditional correlations. Instead, the former head of global quantitative research at Credit Suisse was illustrating the environment that's been created as a result of firms being inundated with data.

"I don't really think that we have a problem in finance of people producing things that they know are just wrong and putting them in their models ... I think there's a problem of people not knowing anything about data or science," Rothman said. "This is becoming more and more acute, because in this world you can get any data that you want."

Rothman explained how the growth of the alternative-data market has made it possible to get data on everything from the location of every metallic grate in Washington, D.C., to the number of items lost but not claimed on the New York City subway system.

This nearly endless universe of information has led data scientists to make some interesting connections, which Rothman highlighted.

One example is face width-to-height ratios. Accounting and finance journal studies have found that hedge fund managers with wider faces underperform because they take needless risk. The thesis, Rothman said, is that wider faces are typically a result of more testosterone, which means the person might tend to be more aggressive.

The correlations extend beyond Wall Street, Rothman added, as a study found that CEOs with wider faces typically exhibit more risk-taking behavior, have earnings misstatements that need to be reported, and face more regulatory actions.

"When you do your due diligence on a fund manager or a portfolio manager, are you going to do facial scanning on them and judge their facial width-to-height ratio?" Rothman asked.

There is also growing academic literature on the ties between stock returns and lunar cycles, Rothman said. Studies have found volume and volatility fluctuates with the moon to the point where investors should go long on the market when it's a new moon and short during a full moon. Following that strategy, an excess annual return of 8.5% could be achieved, according to one paper Rothman cited.

"You think it's crazy, but I don't know," Rothman said. "Are you going to put it in your market-timing strategy? Are you going to over-fit? Or are you going to actually say no."

Rothman finished his presentation with another study that found countries where Shania Twain had a top-five hit between 1995-2002 had GDP growth rates that were 2.6 times higher on average over the subsequent five years than countries that didn't - the rationale being that Twain songs being popular meant stronger relations with the US, which led to economic growth.

In actuality, the study was fabricated by Rothman as an example of how the correlations that seem the most likely can actually be false.

"Be diligent. Be skeptical. Be wary of bull----," he said.

Read more: Hedge funds are getting swamped by alternative data. Some want to fast-track how they buy it and focus back on trades.

Read more: The alt-data industry is having growing pains after its sudden glow up - and insiders are looking at new pricing models and unlikely customers

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