Traditional long-only investors are joining quantitative early-adopters in using alternative data as a means of achieving investment alpha.
Nearly half the investment managers participating in a new study from Greenwich Associates use alternative data, with another quarter planning to do so in the next 12 months. Budgets for alternative data are up 52% in the last year, and 56% of investors have added new alternative data sources in the last two years.
Until recently, the usage of alternative data has been confined mainly to the realm of quantitative investment managers, says Richard Johnson, Principal of Greenwich Associates Market Structure and Technology, and author of Demystifying Alternative Data. Now, alternative data is beginning to go mainstream, with increasing interest from fundamental and hybrid asset managers.
Demystifying Alternative Data examines recent trends in the adoption of alternative data and attempts to demystify its usage by taking a deep dive into how some investors are using supply chain information, such as bills of lading from cargo vessels, to help chart a course for alpha.
Investors Want Help Digesting Data
A strong message from the alternative data investment specialists participating in the study is that the tools and techniques for analyzing the data are as important as the data itself. Alternative data in raw format is often unstructured, requiring extensive scrubbing, normalization and back-testing before it can be effectively utilized, explains Richard Johnson.
Reflecting this, 62% of users prefer the data to be packaged by data providers in some way, as opposed to delivered in raw format, and 83% want some assistance in ingesting and processing the data.
Traditional Market Data Vendors Becoming Important Alternative Players
The advance of alterative data beyond quantitative funds to more fundamental and hybrid investors is causing a shift in the vendor landscape. More traditional financial information vendors are expanding into this market and developing offerings tailored to this new segment. Indeed, the top five sources of alternative data identified in the study are all large, integrated market data vendors, with smaller independent data vendors recording much lower penetration among this demographic.
This is a sign of how the industry is maturing, and the extent to which large market data vendors have upgraded their products to incorporate alternative data sources, says Richard Johnson.
