Buy-side firms have unprecedented access to data, and powerful tools to analyze that data. This is a good thing. However, if everyone has access to the same data and similar tools to analyze it, the quest for alpha becomes harder than ever. So institutional investors are looking for new data sets from which to extract alpha. We present to you: alternative data.
Alpha is the needle in the haystack, but now everyone is on the haystack with awesome pitchforks
By no means would DIH every say finding alpha has every been easy, but consider the current world of capital markets.
Everyone has access now to market information. Real-time market data feeds no longer require a lot of expensive hardware and bandwidth to receive. Company financials and fundamental data are readily available to the public. Whether you’re quantitative or discretionary in your approach, everyone basically has the same (traditional) data at their fingertips. We’re all in the same haystack.
Plus, the tools to analyze this readily available data have greatly improved in recent years. The cost for those tools has also dramatically reduced (thank you, open source!). So now we all have new, shiny pitchforks.
What about brains? Aren’t some of us smarter than our peers, and therefore at an advantage when looking for alpha? Just as we feel about our children, we want to believe our quants, portfolio managers and traders are the smartest of all. However, let’s face it — institutional investors only hire the smartest people they can. The days of getting a job on Wall Street because you were in the same fraternity in university as one of the firm's partners are long gone. You must have the brain matter to do the intellectually demanding work. So the likelihood that your firm is dramatically “smarter” than your competitors may be a bit of stretch. Sorry, but it’s true.
In this new leveled playing field, many firms are looking for an edge by adopting alternative data.
What exactly is alternative data?
There are a lot of definitions floating around, but at DIH we like to define alternative data (a.k.a. “alt data”) as data that comes from a nontraditional source, often outside the capital markets community. Alt data can yield new insights that complement more traditional data.
Some examples of alt data include:
How the buy-side uses alt data
If you’re not yet analyzing alt data, here are some examples of how your buy-side peers are utilizing alt data:
Satellite Imagery — When evaluating a publicly traded retailer, you might look at pictures of shopping mall parking lots over time. Combine this imagery data with foot traffic data and more traditional retail sales figures.
Private Company Data — If a tech stock has announced the release of a new product, you could look at its supply chain, made up of various components coming from small, privately held suppliers all over the world. Are any of those suppliers under financial stress (e.g. an increase over time of their accounts payable, recent court filings, downgraded credit ratings, etc.) that may adversely impact the timely delivery of the tech stock’s new product?
Online Shopping Data — If a consumer electronics company releases a new version of one of it’s popular products, you could detect an issue with the product’s quality from the ratings given by online shoppers BEFORE the company releases its quarterly financials.
Healthcare Data — If you track the pharmaceutical and biotech industries, imagine the insights you could glean by having a holistic view of drug research, manufacturing and distribution. You could trace drug development from clinical trial to patent expiration, or explore reports of adverse drug effects.
The challenges slowing the adoption of alternative data
Based on a survey conducted by Greenwich & Associates in late 2016 of buy-side firms, 80% want to access more alt data. So why hasn’t alt data become more mainstream?
What You Need to Know
Despite the challenges faced by some institutional investors to adopt alternative data, the competition for alpha is always going to be strong. Even if your firm doesn’t embrace alt data, [you know that] your competitors will. It’s for that reason we expect to see broader adoption of alternative data going forward.
DIH offers various alternative data. To learn more, please contact us.
Tom Myers is the founder of Data In Harmony (DIH), a data consultant and provider. DIH help firms find the data they need, validate & clean data, integrate data, and monetize their data. DIH also provides a wide variety of financial and alternative data, as well as data engineering tools.