Alternative Data Sets in Hedge Funds

Posted by Arup Das on March 14, 2018

As Internet of Things (IoT) grows, the amount of data available will also grow. The vast amount of data IoT generates will be extremely valuable. According to a study done by Gartner, revenue that is generated from IoT services and products will exceed $300 billion by 2020. Big data will only grow more important as businesses, such as hedge funds, use this data to gain competitive advantages.

What is Alternative Data?

Alternative data is data about a company published by sources other than the company itself. This data gives insight on investment opportunities, deriving the alpha of an investment. Alpha is defined as the active return on an investment, gauging the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. Alternative data is considered to be big data, which means that software is usually used to collect this data. Web scraping and acquisition of raw data are some of the common ways alternative data can be accessed. Web scraping is the extraction of data from website.

The Importance of Alternative Data

Information is power. The more information we have, the better we make a decision. The way firms leverage information they have is ultimately how they will survive in the marketplace. Hedge funds are starting to buy as much data as they possible can; Hedge Funds rely on alternative data to make investment decisions. Financial models and investment strategies are created from this alternative data. “The aim for any fund is to beat market consensus to realize better gains and grow the fund. However, the traditional datasets that are used to make these financial models are easily accessible and available to the entire cohort of hedge funds, thereby failing to give information that can provide a competitive edge.” According to research and consulting firm Tabb Group, alternative data was worth $200 million in the US in 2016, and is expected to double in four years. This data can be anything ranging from social media posts, credit card transactions to satellite images. Data brokers, aggregators, and other intermediaries are beginning to specialize in providing alternative data to investors and analysts.