Originally published in Markets Media, March 11, 2019
By Terry Flanagan
Alternative data has moved into the mainstream.
Data found off the beaten path of wire services and economic reports was an input in investment decision-making at 79% of financial firms surveyed in the third quarter of 2018, according to a Dataminr and WBR Insights report. Notably, 82% of non-users said they plan to use alt data within a year.
In essence, four of five trading and investment firms source data from social media, credit-card transactions, weather reports, satellite imagery, and other non-traditional areas. And of those who aren’t, four of five soon will.
“It’s no longer the case that alternative data is ‘nice to have’,” said Ed Oliver, VP, Strategic Accounts at Dataminr. “It’s now ‘need to have’.”
Of the traders and portfolio managers who reported using alternative data, 63% use it for the core purpose of making trading decisions. But multiple other related uses were reported, such as for situational awareness (61%), to gain real-time insight (54%), and as an input into an initial investment thesis. Alt data is also used for enterprise-level functions of investor relations (44%) and regulatory/compliance (39%).
Firms are putting real money behind their alt-data initiatives: nearly 30% of survey respondents are spending at least $2.5 million per year, and 54% of respondents expect their companies to spend more on alt data in the next 12 months. Just 5% expect their firms to spend less.
“Alternative data provides value, full stop,” Oliver told Markets Media. “The conversation has moved on from that. Now the questions are about what is the right source of data for your strategy or focus?”
Alt data is defined as any set of data outside of pricing data, reference data, volume data, or fundamental company information. It is used to supplement, rather than replace, those traditional data sets that have existed as long as securities markets have existed.
Advantages of alt data include its flexibility and capacity for customization, its greater potential for being exclusive information, and its speed of delivery for breaking news.
On the latter point, the report noted that alt data can beat digital media. Information can be tweeted at the scene of breaking news, essentially in real-time; a story posted on a website handily beats the the legacy next-day newspaper in terms of timing, but it still takes minutes or even hours to publish.
“When you get a ‘breaking news alert’ on your phone, say from traditional outlets like newspapers and news sites, very often that news is already in progress. It’s essentially ‘old’ news, and its impact has already begun,” Oliver said. “It is breaking in the sense that the journalist is breaking it for its readers, but it’s not a real-time event. It’s not what’s happening in the moment.”
Hedge funds are arguably the most natural consumers of alt data, as they typically have more leeway than large institutional investors in terms of how and where to find alpha. But institutions investors are very much involved — at UBS Asset Management, it’s about faster data access, richer data sources, and more robust data analytics; BlackRock starts with the right quality and quantity of data, and deploys technology and innovation to unlock value.
“Why wouldn’t asset managers want to use every tool available to them to generate better returns for clients?” BlackRock wrote in a July 2018 report. “When structured in the right ways, alternative data has the potential to provide insights into company and industry prospects.”
To be sure, capturing and utilizing alt data isn’t without its challenges — respondents to the WBR survey reported lack of workflow integration, too many data sources, and information integrity among the chief headaches.
“You’ll need to decide your goals when implementing alternative data and also how you plan to incorporate this new information with your current processes,” said Dataminr’s Oliver. “But firms are realizing there are a number of ways to integrate the data sources successfully with what they’re already doing.”