Can Hackathons Be a Valuable Business Tool?
Hackathons are popping up everywhere nowadays. It used to be a useful leg up to disruptive technologies, but nowadays more and more industries use the concept to improve existing processes, enforce an innovation culture or invent new products. A hackathon is a unique tool for inspiration and disruption, often based on design thinking principles. These events can be really useful when you want to come up with disruptive (technological) solutions. Also it’s a great meeting place for students, small businesses and enterprises; it has potential to attract young talent and identify leaders. But frankly, a critical marginal note, how fair are contestants treated by the parties that commission the topics?
What is a hackathon?
A hackathon is a work marathon of mostly 24 up to 48 hours to build or design solutions from scratch. Public hackathons – that represent about 75% of the total number of hackathons – connect entrepreneurs, students and software developers, where internal hackathons unite colleagues with diverse skills throughout the organisation. Nowadays the hackathon approach is not only used by start-ups to accelerate their technology, but also by businesses to break through organisational inertia and engage people in a more innovation-driven organisational culture. This means not all events aim for coding solutions. A lot of them focus on a certain domain, like for example environmental issues, healthcare problems and public safety concerns, irrespective whether the submitted issues are solved by technology or not.
Missing the point
Unfortunately too often hackathons are approached as fun outings and the results are frequently of little use. The context of the theses often are a too open to develop a specific tailored solution.
Currently the sponsors that set out the assignments and/or delivers relevant datasets profit hugely from participants, since compared to the value of a good idea the price money is often a ridiculous farce. I have been involved in hackathons as an observer and as a coach, and have seen how incredible smart many outcomes are. The thing is, especially at public events, participants often seem to be uninformed or unconcerned about intellectual property. They don’t seem to understand that their knowledge and creativity that could be worth a fortune is up for grabs.
In how many cases have end results actually been implemented ‘as is’ in practise by the parties that commission the topics? Have you ever seen a hackathon winning solution been launched as the actual concept and with the purpose it was developed for? Ultimately the involved sponsors will run off with the ideas to use it as a vital link in their own business. Again, for only little money in ratio to what it’s worth. Hackathons would much more effective if participants would be given the opportunity to further develop their ideas within a sponsors company. Their fresh look and way of thinking could deliver state-of-the-art solutions that companies initially wouldn’t have because they are set in their habits and suffer from tunnel vision.
Three reasons to say ‘go’ to hackathon events
Collect ideas for new solutions
New ideas are the most obvious benefit. Not end-to-end solutions, but snippets that make you think differently about you product or service. The most important part of getting new ideas is that it should be about what your user needs. It all involves around the empathy of that user, his or her pain points. So the ideas should be about what you are trying to solve for them. New views, knowhow and team synergy could do that trick.
Improve processes in digital transformation
Many processes have been in place like forever, and aren’t suitable for the fast pace of change. According to McKinsey, “hackathons can be adapted to greatly accelerate the process of digital transformation. They are less about designing new products and more about “hacking” away at old processes and ways of working.”. Digital transformation is a huge cause of disruption. Processes mostly weren’t set up for changing business models. A hackathon could deliver the right line of approach to shed light on an entangled IT infrastructure.
Unlock an innovation culture
Changing work location can be invigorating. Especially off-site locations provides employees relief from their day-to-day routine. Interacting with different colleagues than usual and performing different tasks people aren’t too familiar with yet can be a trigger for creative thinking. It might let them think boldly and open their minds to different ideas. And keep in mind, hackathons can be great to recruit new talent!
The bigger picture: design thinking
Almost every hackathon starts with a workshop or meetup on design thinking. Why is this method considered so powerful? I’ve read many definitions of design thinking, but the one formulated by IDEO founder David Kelley I found the most suitable: “A human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.”
Design thinking is useful for hackathons, because it is a process by which groups can collaboratively explore opportunities. It focusses on building ideas up instead of dissecting it. The design thinking method has three building blocks that altogether put the focus back on the customer: people, technology and business. It helps you to see the bigger picture and define what will truly make a difference.
Involve participants in further development
So, hackathons can be valuable for several purposes. Whether you like to use the hackathon model to scope out existing processes, an innovation culture or new products, it could open doors that will have a disruptive impact. But it’s crucial that although participants subscribe to be a part of a hackathon, their meddling in the presented issues are approached as collaboration. Only then an idea can be carried out as it was set out to and the reward of winning ideas becomes fair!
Multi-Factor or Not Multi-Factor? That Is the Question
Written by: Chris Shuba, Helios Quantitative Research, LLC
Let’s pretend you are a US investor that wants to deploy some of your money overseas. You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment. Your investment decision is logical to you. But you have choices: You could a) simply invest in a traditional index like the MSCI EAFE, b) invest in a fund that systematically emphasizes a single factor (like a value fund) that only buys specific stocks related to that factor, or c) invest in a developed fund that blends several factors together, like the JPMorgan Diversified Return International Equity ETF (JPIN). What is the best choice?
Investing in a traditional international market capitalization index like the MSCI EAFE is not a bad choice. It has delivered nice returns for a US investor, especially uncorrelated outperformance in the 1970s and 1980s, and helped to diversify a US-only portfolio.
Your second choice is to invest in one particular factor because it makes sense to you. Sticking with the example of a value strategy, you might believe a fund or index that chooses the cheapest or most attractively valued stocks based on metrics like Price to Earnings (PE) is best.
You could go find a discretionary portfolio manager who only buys stocks he deems to be cheap. Typically the concept of “cheap” is based on some absolute metric that the manager has in mind, such as never buying a stock with a PE greater than 15. If there are not enough stocks that are attractive, he will hold his money in cash until he finds the prudent bargains he seeks. This prudence also obviously risks possible underperformance from being absent from the market.
The alternative is to buy a value index or fund that systematically only buys the cheapest stocks in a particular investment universe. So if there are 1000 investable stocks available, the index ONLY buys the cheapest decile of 100 stocks and is always fully invested in the 100 securities that are relatively cheapest. This is an investment approach that a discretionary manger may disdain. The discretionary value manager may look at those same 100 stocks and think they are pricey. But nevertheless, academic research has shown that always being fully invested in the relatively cheapest percentiles of stocks in the US has produced superior returns over many decades.
Such a portfolio is called a “factor” portfolio. Why the name? In the early 1960s, academics introduced the concept of beta and demonstrated that individual US stocks had sensitivities to, and were driven by, movements in the broad market. In the early 1990s, academic research began to show that other “factors” such as value and size also drove US stock returns. Since then, several factors have been identified as driving individual stock outperformance: value, size, volatility, momentum and quality. Stocks that are cheaper, smaller, less volatile, have more positive annual returns and higher profitability have historically outperformed their peers. It turns out these factors also work internationally.
Related: Who Gets Sick When the U.S. Sneezes?
Of all the factors, value is the factor that has been the best known the longest (even before it was academically identified as a “factor”), thanks to the books of Warren Buffet’s teacher Ben Graham. And if you look abroad at an array of developed global markets and create a value index and compare it to its simple market capitalization weighted brother, the historic outperformance of value has been stunning. Until recently.
While there was some variability by country, on average from the mid-1970s up until 2005 a value factor portfolio in a developed market outperformed its market cap weighted index by about 2% a year. That’s a lot. By contrast, since 2005, the average developed country value portfolio has underperformed a market cap indexes by about -40 basis points. Which is the danger of investing in one factor. It may not always work at every point in time.
So if investing in one factor like value runs the risk of underperforming, how about a multi-factor international developed equity portfolio?
Below is a breakdown of individual factor portfolios’ performance in international developed equity markets since 2005, an equal weighted factor portfolio as well the performance of the MSCI EAFE as our performance reference. Note that, for the last 13 years, value has been the poorest factor by far, while the others have handily beaten the EAFE. An equal weighted portfolio of all 5 factors, while not as optimal as some of the individual factor results, beats the EAFE by 1.6% and has an information ratio, or risk adjusted returns that are superior by 37%. The equal weighted factor portfolio also has the advantage of not having to predict which factor will work when, so even when a factor like value does not beat the market, the other factors can pick up the slack.
SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.
The equal weighted factor portfolio has one other advantage over the market cap weighted alternative. Note in the chart below how well the portfolio outperformed in the 2008 crisis, so it tends to do relatively well in highly volatile sell offs.
SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.
While it’s not inconceivable that one or two of these factors could erode, or underperform for a stretch, the fact that you have exposure to multiple factors in a portfolio that seems to do especially well in crises suggest the multi-factor blended portfolio remains the most attractive way to invest in developed markets.
So, when asked the question: Multi-factor or not multi-factor? The data speaks for itself.
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DEFINITIONS: Price to earnings (P/E) ratio: The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
DISCLOSURES: MSCI EAFE Investable Market Index (IMI): The MSCI EAFE Investable Market Index (IMI), is an equity index which captures large, mid and small cap representation across Developed Markets countries* around the world, excluding the US and Canada. The index is based on the MSCI Global Investable Market Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large, mid and small capitalization cutoff points are recalculated.
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