Use of alternative data is on the rise, and a new study from the Alternative Investment Management Association (AIMA), in collaboration with fund services and technology provider SS&C, finds that more than half (53%) of surveyed hedge funds globally now use alternative data to help them generate outperformance.
Alternative data is unconventional or non-market data that doesn’t fall within the realms of traditional financial and economic data. Examples include data from consumer spending, weather patterns and satellite imagery. Due to factors such as the increase in the amount of data itself and advancements in data science, the number of alternative data providers has now grown to over 400 (in 2018) up from just 20 in 1990.
“The world we live in is becoming more and more digitised and, as such, the amount and types of information that hedge fund managers can use to either research investment ideas or improve their understanding of current portfolio positions will also expand,” says Jack Inglis, CEO of AIMA. “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.”
The report, which explores the rate of adoption of alternative data within the global hedge fund industry, surveyed over 100 hedge funds globally with combined assets under management in excess of $720 billion. It found that one in two hedge fund managers already use alternative data, with 25% of these considered to be ‘market leaders’ or hedge fund managers that have been using this type of data for more than five years. The remaining 75% of users have been using alternative data for less than half a decade.
The most popular datasets are consumer spending and lifestyle-focused, such as retail footfall in shopping centres and credit card receipts. Web-crawled data (extracting information stored in web pages) is the second most widely used, followed by data sourced from expert networks and bespoke research that may include data from “unconventional sources.” A further 10% of hedge fund managers also use climate-related data.
There is growing evidence that the use of these alternative sources can generate measurable advantage. According to the report, 69% of market leaders use alternative data to help them generate outperformance (compared to 44% of ‘the rest of the market’). However, only 23% of market leaders use alternative data to help them improve risk management processes, against 36% of ‘the rest of the market.’
However, concerns remain around regulatory and compliance challenges, including data owner consent, privacy issues, intellectual property rights infringement, consumer protection and practices that could provide an unfair advantage. Frameworks around the governing of data are changing rapidly, and a fifth (20%) of hedge fund market leaders surveyed for the report identified regulatory and compliance issues as a concern.
“As the markets evolve, we see a lot of opportunity for technology innovation to make insights from alternative data actionable and seamlessly integrate them into investment processes. Technology can also help mitigate the regulatory challenges brought on by alternative data, ensuring funds can keep up with best practices,” suggests Michael Megaw, Managing Director, Regulatory Analytics and Data at SS&C.