AlphaQ: Investigating the Woozle effect

Woozle may not be an academic term with which you are familiar, but watch this space, literally. Nearly a year ago, Mark Pacitti, and Charlie Ellis founded Woozle Research, a solution to the Woozle effect theory of evidence by citation, whereby a finding gets repeatedly quoted until taken as the truth.

Disambiguation is another term for the phenomenon, but doesn’t trip as easily off the tongue. Pacitti was at multi-strategy firm Citadel for three years working in state of the art developments for global quantitative strategies, looking at alternative data sets such as till receipts and satellite imagery.

He left to set up Woozle Research, a firm dedicated to providing institutional investors with primary research and equity intelligence using human sources or what Pacitti likes to call ‘systematic scuttlebut’.

“What I find is that a lot of the industry uses buzz words like big data and machine learning,” Pacitti says. “A lot of it is noise, so what is interesting to me, is that primary human intelligence gathering actually yields interesting results, new fundamentals that people aren’t talking about.”

This mosaic of human intelligence spreads across the 70 and growing consumer companies globally that the firm covers. “It goes against the random data collection and finding the hidden signal,” Pacitti says. “What we do is less prone to paradigm shift as we gather human intelligence sourced directly from companies under coverage.”

Examples of how they work include interviewing a mosaic of company stakeholders to capture leading and exclusive insights into the direction, magnitude and reason behind in-store sales and profitability.

Sainsbury’s better than expected sales figures over Christmas were also correctly called by Woozle, based on their primary research (such as observation, surveys, polls) to target key stakeholders (such as employees, customers, delivery sites) to predict company earnings.

“In six months or so, we have managed to partner with several multi-billion dollar assets under management hedge fund clients,” Pacitti says. “They like the fact that it is a cross between equity research, but not from a press or management statement, but going to the source on the ground, sleuthing to get the information.”

The firm declares who they are when conducting research and doesn’t break NDAs, but relies on a mosaic of non-material, public information that in aggregate provides their clients with an informational edge.

“It’s a mosaic of public information that may be material once it has been collected as a huge amount,” Pacitti says.

Their system lends itself most to consumer firms, but the deep research team can take on custom projects. “We can do healthcare, what drugs professionals are prescribing, or automakers, talking to dealerships and examining the supply chain. The way we look at it is focusing on the key stakeholders in any country and intelligence gathering techniques and use those two mechanisms to develop the products.”

The service is subscription led, allowing people to pick the companies in which they are interested or do a customised search across a sector, such as supermarkets, where sometimes they track all seven of the UK supermarket chains.

Pacitti has written a paper on MiFID II – headed with Einstein’s quote: ‘If we knew what we were doing, it wouldn’t be called research’ – and believes that while, in the short term, the restrictions on third party research will be detrimental for everyone involved, in the long term, funds that use Woozle are happy to pay out of their own pockets, so it will probably not affect them.

By | 2018-02-01T19:53:11+00:00 February 19th, 2017|Article|0 Comments