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How Hedge Funds Can Use Alternative Data Sets

Chain of Demand

Alternative data is non-market information that doesn’t fall inside the domains of typical financial data. Anything from buyer spending, climate data, and satellite imagery can be alt data.

As a hedge fund in today’s modern landscape, gaining a competitive edge via data helps meet speculation needs and create alpha proficiently. Using alt data sets offers new opportunities moving forward. Out of a group of managers surveyed, half were using alternative data to make better decisions, with 25% of these considered to be ‘market leaders’ or hedge fund managers.

Types of alt data set hedge funds can use

Consumer spending and lifestyle data

The three most-normally utilized elective information that hedge funds could use is consumer spending and lifestyle data. Understanding shopper spending — extracted from sites — helps to really understand the market, especially in retail. Some examples of consumer spending and lifestyle data include credit card receipts, retail footfall in shopping centers, etc.

consumer spending

Web-crawled data

Web crawled data is getting extensively utilized as a way to make decisions. From both the sell-side and resource administrators, firms are using data mining techniques to crawl the web and find useful information that they can apply to their financial decisions. There is a lot of information on the web and extracting this information from within web pages can help hedge funds gain a competitive edge.

Climate-related data

climate data

With environmental change playing a huge part in the way the world turns, climate data is expected to be more pertinent for investment portfolios. Simultaneously, ESG (ecological, social, and administration) signals are showing to be a key factor in mutual fund’s efforts for alpha. In fact, it is stated that 10% of managers are using climate-related data.

Opportunities for using alternative data in hedge funds

Since the COVID-19, sectors all over the world are changing. Financial firms are doing just the same, as they look into alternative data to help boost their decisions. For hedge fund managers to meet their customers’ venture needs, they need to do more than what they have been doing to gain a legitimate information edge. The rise of alternative datasets offers new opportunities for managers.

“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.

Jack Inglis, CEO of AIMA

Enhance performance

Alt data gives a bigger volume of information, especially data that is not easily accessible. Collecting information from areas that would otherwise be ignored can offer tremendous opportunity for managers to become leaders. Interestingly, 69% of market leaders use alternative data to generate outperformance. By comparison only 44% of ‘the rest of the market’ does not.

Risk analysis

Risk management in today’s world emphasizes simplifying risk rather than deeply understanding the sources behind it. In other words, current risk management efforts aim at identification that risks have occurred, instead of discovering the root of the issue. For companies and investors, understanding the reasons why can change the game. Over longer horizons, the correlations in conventional datasets often break down and poorly reflect the range of events that had occurred. Alt-data helps to eliminate these issues, by providing more context.

Better prediction

One of the reasons for the interest in alt data having grown significantly is its promise to help forecast company financials at a faster, better rate than the antiquated method of quarterly reports. In the last decade alone, the sources of alt data have diversified and expanded greatly. With so many taxonomies of data out there, there is a lot of insight that managers can gain and much deeper predictions that AI models can make from this.

Make data work for you

Alternative data is tremendously beneficial for hedge funds. Not only is it transforming the investment process, it is affecting everyone along the value chain, from hedge fund managers to private equity.

While the definitions differ depending on who you speak to; overall alternative data can largely be seen as any nontraditional dataset supporting investment decisions. Beyond the opportunities listed above, these non-conventional datasets can also pose risks. Due to the way the alt data is sourced and processed — compared to traditional data — it is difficult to provide assurances.

With Chain of Demand, managers can rest assured of the data quality, as we have processed hundreds of millions of data points — especially in the retail space. Using predictive analytics to improve performance and predictions, our Predictive Insights helps to make data easy, taking out all the guesswork.

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