Alternative Data in The New Decade

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Alternative data is a secret weapon financial firms wish to keep on the down-low. After all, Wall Street is designed to reward those who find better ways of assessing risk and punish those who don’t.

The recent health pandemic puts alternative data to the ultimate test to prove its merits. Certain industries, like alternative investing, have long used these newer forms of data to enable better predictive outcomes, but widespread use has been lacking, especially in the middle market.

But that is rapidly changing. And as the pandemic evolves, alternative data has the ability to give insight beyond what is gleaned from traditional data, which companies have long relied upon to make decisions but which has its limitations.

According to Deloitte’s research, Alternative, data will likely transform active investment management (IM) over the next five years, from hedge fund managers to long-only mutual funds, and even private equity managers.

Those firms that do not update their investment processes within that time frame could face strategic risks, and might very well be outmaneuvered by competitors that effectively incorporate alternative data into their securities valuation and trading signal processes.

According to a study, jointly published by AIMA and SS&C, more than a quarter of those polled (27 percent) manage more than USD5 billion in assets, while 25 percent of those surveyed are considered to be “market leaders” – or hedge fund managers that have been using alternative data for more than five years.

The report found that well over two-thirds (69 percent) of those market leaders now use alternative data to generate outperformance, while close to a quarter (23 percent) of them employ it for their risk management processes.

Although alternative data is becoming more widespread across the asset management industry (indeed, it is already being used more widely within corporate sectors, such as technology), it is still a relative niche source of information that is used by alternative asset managers.

According to the Open Data Institute (ODI), the alternative data market, however, remains a very small part of the multibillion-dollar market for access to the stock market and other financial data. While the governance and norms for the licensing and distribution of traditional data are well established in many countries, the alt data market is at an early stage

As such, this data tends not to be too widely distributed, unlike traditional data which has been widely made available through information sets managed either by public bodies or private actors.

The signals for the future adoption of alternative data helping generate alpha seem positive, yet also mixed. Research on the adoption of alternative data by investment managers indicates that the question to ask may not be whether, but how quickly alternative data usage could become mainstream.

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