Why Hedge Funds are Using Alternative Data

Chain of Demand

More than half of hedge fund managers now use alternative data to gain an advantage over their competitors by supporting risk management processes. With the advent of machine learning technologies, the use of this data has become much more economical.

Alternative data is used by hedge funds to understand investment trends better. To gain a competitive advantage, these funds provide managers with information beyond conventional financial and economic data. However, gaining access to alternative datasets is not easy, and even so, making sense of it all is another thing. Despite all that, alternative data can help managers make more forward-looking decisions.

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The Importance of Using Alternative Data in Hedge Funds

As mentioned above, more than half of hedge fund managers now use alternative data to gain a competitive advantage. This data represent unique non-traditional and non-market financial and economic information such as satellite imagery, social media comments, and business climate patterns. Recent studies show that nearly 69 percent of hedge fund executives use alternative data.

Risk managers use signals of environmental, social, and governance change to make better decisions. Surveys also show the widespread use of credit card data. Instead of using traditional study processes and data, hedge fund manageres use systematic and quantitative approaches using alternative data.

Top Alternative Data Types Used By Hedge Funds

A wide range of alternative data is provided to hedge funds by providers of this type of data. As mentioned earlier, hedge funds typically use various alternative data, including web data, customer transaction data, social networks, app data, web traffic, geolocation, satellite imagery, and incoming emails.

Asset managers gain many benefits by improving their analytical capacity from structured time series and accounting information. In general, the current use of hedge funds is increasing day by day.

Use Cases of Alt Data

  • Integration of market data — Market information is available for free on websites. But how do we extract the correct data from the millions of active websites? Receiving a steady stream of corporate operating information and removing redundant data from websites and online databases is one of the critical applications of alternative data in investment processes.
  • Price monitoring — Monitoring companies’ prices and inventory levels to better monitor supply, demand, and consumption in a significant range of companies is a huge signal that helps to generate more alpha. 
  • Competition analysis — Competitive analysis is used in various industries such as investment and stock research. Finding the level of competition in the market and how competitors are performing in areas related to your company’s professional activities is a crucial issue.
  • Financial statementsFinancial professionals always want the preparation of financial statements in various formats. Financial analysts need hundreds of financial statements to be able to analyze customer data appropriately. 
  • News data — Investment companies are increasingly making decisions based on news from manufacturing and service companies active in the market. By extracting news headlines and related articles and using them for analysis, investment firms gain a valuable understanding of events and attitudes that affect their company and products.

Final thoughts

Alternative data provides opportunities for hedge fund managers to make the right decisions about their investments at the right time. The main attraction of alternative data for hedge funds is that it can provide information that other market shareholders do not have, ultimately helping to generate alpha for investors.

There is no doubt that alternative data is changing investment management processes for asset and hedge fund managers. However, just simply gaining access to the data is not enough. You need to learn to make sense of it. This is where Chain of Demand comes in, as we provide investors and managers access to millions of data points, all the while helping derive insights to generate alpha.

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