Larker said it’s not surprising hedge funds have hired linguists and others to build algorithms and conduct natural language research. "Everybody is looking for an edge," said Larcker. "Any communication that is coming out of a company now is being subjected to linguistic analysis."
“Whether you’re looking for excess value or risk mitigation, if an investor can get it by running an algorithm across transcripts … that’s huge,” Larker said. He said that’s especially true when taking into account that an equity manager may have a universe of 800 stocks that pass a stock screen and still need to toss 750 out. “It makes sense to say, ‘here are the ones that have a high score on deception. I don’t need to know which one is lying, but I can capture some of the bad ones and delete them from the screen,’” Larker explained. “That helps protects you from torpedoes,” he said.
Australia-based Credit Suisse equities analyst Richard Hitchens believes the investors poised to benefit the most right now are quantitative investment managers.
“A shortcoming of pure quant investment processes is that they typically lack direct contact with company management,” Hitchens wrote in a survey of the new approaches to management analysis published late last year. Hitchens explained, “A primary nonquantitative piece of information picked up on in their direct management dealings, that can then influence their investment decision, is the tone of the language being used, i.e. how positive or negative it is, and in particular how it has changed relative to their most recent previous dealing.”
Larker said textual analysis has a longer track record because it's been the easiest approach. The reason the older efforts have focused on transcripts is that they are easy available, but as investors go further down this path it's a combination of words, voice, and images that will all be used together to make the data "speak."
Hitchens predicts that "picking up on investment signals from the use of voice and body, e.g. voice inflection, speech volume, speech rate, speech errors, facial expressions, hand gestures, posture, and movements, will likely remain a key competitive advantage for fundamental investors for the foreseeable future."
Valens has analyzed 18,000 calls.