Analytics provider RavenPack has identified a dozen use-cases for traders seeking to profit from alternative data. In a new report – ‘12 Validated New Ways to Capture Alpha with Alternative Data’ – the company demonstrate how news analytics provides original sources of alpha not already factored in by existing indicators and models.
The report – a compilation of research studies published by the company’s in-house data science team and independent researchers – covers a number of use cases. These include trading strategies based upon ESG-sensitive news headlines, changes to earnings release dates, company insider transaction news, and novel ways of using news analytics to forecast geopolitical events such as the Covid-19 pandemic and US election results.
According to Chief Data Scientist Peter Hafez, an increasing number of firms are now looking at how to apply natural language processing (NLP) to news content in order to uncover trading signals. “A lot of firms today are tapping into news content in a systematic way”, he says. “News moves markets. There is a fundamental link between whatever happens in the news and potential decision making.”
Although the most sophisticated quantitative hedge funds have been using these methods since the early 2000s, says Hafez, momentum is now building across a much wider user base. “In addition to quantitative asset managers, quantamental and fundamental investors are now looking at news content, sentiment data, and event data as well,” he says. “And it’s use is expanding from equities to multi-asset.”
Although the twelve studies in the report are wide-ranging, two of them deal specifically with the impact of the COVID pandemic. And in March last year the company launched a free Coronavirus News Monitor, to track news about the virus and monitor related sentiment indicators, including a Panic Index and a Media Hype Index.
“What Coronavirus has shown is how powerful it is to have alternative data available in front of you, as part of what we refer to as a Data Mosaic,” says Hafez. “For example, the Panic Index was a key driver of equities markets globally, beyond what could have been captured from confirmed cases.”
The company now plans to greatly extend its data coverage. “Today we track about 300,000 entities, but that will increase into millions of entities,” says Hafez.