Neudata

Alternative Data: Use by hedge funds and the impact on the future of investing.

By Daryl Smith, on 13 February 2018
Estimated reading time: 2.5 minutes


Around twenty years ago, alternative data and machine learning techniques were being used by a select group of innovative hedge funds and asset managers. In recent years however, both the number of fund managers using alternative data and the supply of new commercially available data sources has dramatically increased. Today, many industry practitioners now believe that using alternative data offers a distinct informational advantage over other investment managers that have not deployed such capabilities.

For the uninitiated, the term ‘alternative data’ refers to novel data sources which can be used for investment management analysis and decision-making purposes in quantitative and discretionary investment strategies. Essentially, alternative data refers to data which was, in the main, created in the last seven years and which has not until very recently been available to the investment world. In some cases, the original purpose for creating alternative data was to provide an analysis tool for use by non-investment firms - entities across a wide range of industries. In many other cases alternative data is a by-product of economic activity, often referred to as ‘exhaust data’. Alternative data is mainly used by both the buy-side and sell-side, as well as to some degree, by private equity, venture capital and corporate, non-investment clients.

The terms ‘big data’ and ‘alternative data’ are often used interchangeably and many use both in the context of unstructured data and in some cases refer to large volumes of data.

The term ‘alternative data’ was initially used by data brokers and consultants in the US and it found widespread acceptance around five years ago. The meaning of alternative data is much more widely understood by the US asset management industry than in other regions: in Europe, for example, the term has only become more widely recognised as recently as 2017.

The large number of conferences and events hosted in 2016 and 2017 by the sell-side, traditional data vendors and other categories of conference organiser has certainly helped to proliferate the awareness of alternative data. In addition, many surveys and reports on alternative data and artificial intelligence by sell-side banks, data providers and consultants, in the last year has helped to educate both the buy-side and the wider industry.

The adoption of alternative data within the investment community has been driven by the advancements of financial technology and improved technological capabilities to analyse different datasets. Many investors, hedge funds and asset managers alike view these developments as a complementary tool alongside conventional investment methodologies.

At Neudata, we have recently seen a significant increase in the number of hedge funds approaching us in order to learn more about which alternative data providers they should be using. At the same time, we have also observed a step change in the number of companies actively seeking to sell their data to the institutional investor community. As such, we believe that, much like 2017, 2018 will be a period of substantial growth in alternative data adoption among investment managers.

Author

Daryl Smith, CFA Head of Research (London)