From weather patterns to satellite imagery, over half of hedge fund managers recently surveyed were using some form of alternative data to improve performance.
Non-traditional data types and sources were used to support 53 percent of hedge fund managers, according to a report by the Alternative Investment Management Association (AIMA). Of this group of alternative data users, one quarter were considered «market leaders» or alt data users for more than five years.
Consumer spending and lifestyle data, based on sources like physical traffic in malls and credit card receipts, alongside web-crawled data and data from expert networks were ranked in the top three data sources that were in demand. Some 10 percent of managers also used climate-related data.
Home Advantage
AIMA’s report highlights one of the major advantages of alternative data in capturing insights not readily available to analysts not from the home market. It uses luxury goods as a case where asset owners are almost entirely based in the E.U. and the U.S. while consumption is a uniquely China-centric story – a condition that can «create scope for information asymmetries».
The report highlights the Versace gaffe last year as an example when it sold tees that accidentally printed text projecting Hong Kong and Macau as individual countries which led to expected nationalistic backlash.
By using natural language processing (NLP) capabilities, investors could hypothetically deploy software that would run an online search for news text and rate them for their polarity and intensity to derive a score. A strong score that contrasts a weak stock price could represent a contrarian long opportunity. And vice versa, a weak score that contrasts a strong stock price could represent a contrarian short opportunity.
Bright Outlook
Meanwhile, the outlook appears bright for alternative data: the universe of alt data providers has grown from 20 in 1990 to 400 in 2018 and survey respondents expect industrywide adoption in the next one to five years.
«The immediacy of alternative data, in comparison to the information lag from working with more traditional data, is particularly helpful in moments like this when markets cease to function normally,» said AIMA CEO Jack Inglis. «Hedge funds have long been the innovators of the asset management industry and the first to adopt new approaches to technology, so, unsurprisingly, many are already using alternative data to research investment ideas and improve their understanding of current portfolio positions.»
The survey, titled «Casting the Net,» was based on responses from 100 hedge fund managers accounting for an estimated $720 billion in total assets under management.
