Association Column: Casting the net wider

The pandemic sweeping the world is proving to be an excellent test for alternative data to prove its merits. The virus has led to a surge in demand for alternative data from investors, governments and central banks to interpret how it is impacting industries around the world.

There is a treasure trove of information beyond data derived from balance sheets, company records and government data that one can source from traditional structured data. To help interpret the spread of the virus, rather than relying on sometimes weeks-old information from medical authorities, companies are examining atypical data from real-time or close to real-time analysis. This includes creating interactive maps to identify at-risk groups, and information sets that can help guide on testing, containment and health responses.

Purchase receipt data from credit card transactions, social media sentiment from internet usage/web-scraping and geolocation data derived from satellite images are being used to help investors get a real-time insight into how economies are reacting. The immediacy of these data sets in comparison to the information lag from using traditional forms of data is proving particularly useful during periods like we are currently witnessing, when markets cease to function normally. One can access geolocation data in close to real time. In comparison, transaction data can take as much as five days to come through.

Data is a big disrupter now: 90% of the world’s data available today was only produced over the last two years – a staggering statistic. The pace is only likely to accelerate more, the opportunity set for investors is compelling.

Gaining a legitimate information edge is what helps hedge fund managers meet clients’ investment needs in efficiently managing risk and generating alpha. Hedge funds have always been at the forefront of embracing change and constantly innovating to deliver superior returns to their investors

Amid increasing curiosity around the use of alternative data by hedge funds, AIMA, together with SS&C Technologies, published ‘Casting the Net’, the most comprehensive survey to date examining how hedge funds are using alternative data.

Throughout the current disruption, there are examples of hedge fund managers successfully employing alternative data in navigating market conditions. One Asia-based manager used alternative data to understand how markets may react and, importantly, how to position the portfolio. In particular, it combined information on past outbreaks with web-crawled data which contained internet searches and insights about road congestion, flight schedules and test-kit availability. The manager subsequently delivered outstanding returns to investors as markets turned more volatile and declined considerably during the first months of the pandemic. 

There is broad optimism regarding how quickly alternative data will be adopted within the hedge fund industry; most managers who are users of alternative data expect this to happen within one to five years. The challenges industries face are how best to gather this type of data and derive something meaningful from it. Hedge funds are ready to lead from the front in the use of alternative data as the world casts its net wider.

Tom Kehoe is global head of research and communications at the Alternative Investment Management Association

© 2020 funds europe



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