Alternative Data Provides Significant and Sustainable Investing Edge, Reveals Greenwich Associates Research

Half of investment managers surveyed currently use alternative data, with another quarter planning to do so in the next 12 months

71% of asset managers believe that using alternative data gives them an investing edge over competitors, according to a new study by Greenwich Associates commissioned by business information provider IHS Markit (Nasdaq: INFO).

74% of firms surveyed agreed that alternative data is starting to have a big impact on institutional investing, demonstrating its valuable explanatory power to both quantitative and fundamental investment models.

Around half of investment managers are currently using alternative data with another quarter planning to do so in the next 12 months, according to the research.

Alpha and long-term competitive edge found in alternative data 

Nearly 30% of quantitative funds attribute at least 20% of their alpha to alternative data, the study revealed. Furthermore, 42% of all asset managers believe the alpha edge they achieve by using alternative data lasts for at least four years.

Driven by the value they see, investment firms are spending more on procuring alternative data.  In 2018, budgets increased by 52%, on top of an increase of 76% the previous year, according to the study.

“Even more revealing than the high level of value asset managers attribute to alternative data, is that they also believe using it helps them achieve long lasting competitive advantage,” said Adam Kansler, president of Financial Services at IHS Markit.  “The high degree of industry confidence in alternative data confirms that we are in the early stages of a profound shift toward incorporating more and more diverse datasets into the investment process.”

Investment firms expanding usage and sources of alternative data

More than half of firms surveyed subscribe to one or more alternative data sources and at least 50% of investment funds are increasing the number of alternative datasets they use, committing more internal resources to using alternative data and increasing the role of alternative data in investment models.

The most commonly used alternative data includes web-scraped data, search trends and social media sentiment.

“Today usage concentrates in natively digital information, such as Web traffic, but the most sophisticated firms are already testing more direct and more granular indicators of financial performance,” said Kansler.  “We can provide deep insights into the supply chain dynamics in virtually every industry and our analysis finds significant alpha, for example, in ocean cargo and automobile registration information, as well as in specialty financial indicators like CDS pricing and short interest data.”

Tools and expertise are key to implementing alternative data 

When thinking about the preferred level of support alternative data buyers want from their vendors, a large majority, 83%, want some assistance in ingesting and processing the data.  More than half of firms want access to experts with whom to consult about the sources and methodologies a vendor uses in producing alternative datasets.

“A strong message that we heard from practitioners was that the tools and techniques for analyzing the data are as important as the data themselves,” said Richard Johnson, a principal at Greenwich Associates. “Alternative data, by its nature, is harder to ingest than financial data. In raw format, it is often unstructured, requiring extensive scrubbing, normalization and back-testing before it can be effectively used.”

“Most firms require some degree of technical assistance to get the most out of nonfinancial data,” said Kansler.  “A collaborative service model is essential to bring the benefits of alternative data to the majority of investors.  We offer experts who can consult about our sources and methodologies, prepackaged analytics and a data science team which can partner with firms to design and test advanced data models.”

A free copy of the study, “Demystifying Alternative Data,” is available for download.

For the study, Greenwich Associates interviewed 42 investment specialists at quantitative, fundamental and hybrid asset management companies between December 2018 and February 2019.