“Now, we are hedge fund managers.”
Dave Kersey, Global Head of Media for SharkNinja, made that assertion on a panel that I attended at Horizon Media‘s HorizonOS Labs day. He believes that brand marketers have become solutions engineers, supply chain analysts and, yes, hedge fund managers.
It struck a chord with me because it resonated with an idea I have been developing for a while: that brand marketers and the supply chain that serves them ought to be pursuing something that hedge fund managers call “alpha.”
The pursuit of alpha
I have had an unusual career path. I joined Dstillery as CFO after spending the first 23 years of my career as an equity analyst and hedge fund manager, and had a battlefield promotion to CEO after only 7 months on the job.
I am often asked how that happened. The underlying questions are: what is the connective tissue between the two? What did you learn as an investor that prepared you to be CEO of an adtech company?
Alpha is part of the answer.
Across all the roles and firms I worked in during my investment career, my #1 priority was the pursuit of alpha, whether explicitly or implicitly. In layperson’s terms, and in its most elementary form, alpha is the amount of excess return over the market that an investor can generate from their skill.
The simplest way to understand alpha is through an example. If the market is up 10% over a year and my portfolio is up 15%, I have generated alpha of 5%. (To my hedge fund comrades, let’s leave the arguments about Sharpe ratios, risk-adjustments, leverage, and beta aside for now.)
Portfolio managers generate alpha through superior security selection and sizing. Having large positions in stocks that go up more than the market, and small or no positions in stocks that go down, leads to strong alpha generation.
One of the key ways I sought to drive alpha was to identify data that could drive more informed investment decisions with greater conviction. Government macro data, commercially available credit card data, survey data, web-scraped data — you name it. My investment process was deeply committed to the idea that data-informed decisions drive better outcomes.
That notion was explicitly a part of my decision to join Dstillery. During my career transition from the investment community, my due diligence revealed that Dstillery’s data science was famously good, and that it drove consistently strong results for programmatic ad campaigns.
In essence, Dstillery is in the business of generating advertising alpha.
Optimizing programmatic performance
Within advertising, the programmatic channel is primed for alpha generation. Like financial markets, it is an electronic marketplace that requires real-time decisioning in auctions that bring together buyers and sellers to optimize the value of ad impressions.
The advertising community has adopted a lot of language from the investment community.
Media agencies have “investment management” teams and “principal trading” operations.
Programmatic ads are bought by “traders” who work on “trading desks,” and the industry’s strongest independent buying platform is actually called “The Trade Desk”.
And, for better or worse, many adtech businesses are fundamentally digital media “arbitrageurs”.
However, there are two fundamental differences between alpha in financial markets and alpha in advertising:
1 – No S&P 500 for Advertising
In financial public markets, performance is easy to both measure and benchmark. Your returns can be stacked up vs. the S&P 500 return or the 10-year treasury rate. In advertising, both measurement and benchmarking are less straightforward.
In terms of measurement, different campaigns have different KPIs. There are dozens of measurement models, and even more vendors, to choose from. The question of which attribution methods are best is a debate without an objective answer. Brands choose their preferred method among various imperfect alternatives.
Meanwhile, the closest thing to a market benchmark is the “run-of-network” (RON) performance of a campaign, which is the KPI result that would have been achieved just by randomly buying impressions. It can be measured for an individual campaign with a control budget, but there is no publicly available benchmark similar to the S&P 500.
2 – Advertising’s fuzzy invisible hand
Financial markets are nearly a pure performance-incentive mechanism — investors who generate alpha are directly and handsomely rewarded for achieving that performance. An asset manager who consistently underperforms loses assets under management and ultimately their job.
For advertising professionals, that clarity of incentives does not exist.
Most compensation models for agencies (and the rest of the advertising supply chain) do not directly reward performance. The percent-of-media model incentivizes bigger budgets and cost efficiencies to drive the most revenue and margin. The cost-plus model also favors bigger budgets, but instead of efficiency actually incentivizes higher costs, to which a margin “-plus” can be added. Neither model has alpha-seeking baked in.
Despite those financial incentives, many advertising businesses conscientiously work to drive the best possible campaign performance. However, it is often a secondary goal, intended to ensure client retention, and comes only after the scale and margin objectives have been satisfied.
If performance goals are subordinated to other factors and not directly compensated, they are more of a nice-to-have than a driver of behavior.
Compounding competitive advantage
Over my nine years with Dstillery, it has become clear to me that there is alpha to be had in advertising, and particularly in programmatic advertising.
It is not easy to consistently generate outperformance. The digital advertising ecosystem is complex, fragmented, and opaque. With over 5,000 companies in the LUMAscape, it can be challenging to discern which partners and technologies are truly adding value.
Challenging, but not impossible.
Just as in the financial markets, superior results in advertising can be achieved through a rigorous process focused on leveraging the best available data and technologies, objectively measuring results, optimizing to those strategies and tactics that perform, and ruthlessly eliminating underperformers.
Not all brands care about performance. That leaves more opportunity for those that do, like SharkNinja. Brand marketers who pursue alpha with the same rigor that a hedge fund manager brings to security selection will be rewarded with better outcomes and, over time, will create a compounding competitive advantage.
Alpha is indeed a thing in programmatic advertising. Brand marketers are, among other things, hedge fund managers.