By Rich Newman, SVP and Global Head of Content and Technology Solutions, FactSet
Financial professionals have always used data and technology to make investment decisions; this basic fact has not changed with the centuries.
Today, however, we have advanced technological environments and a rate of change unprecedented in human history. Things are accelerating at a speed that is upending how we as an industry do our jobs and the data and tools with which we do them.
For the last few decades, the data the financial community has been relying on is typically 1.) publicly available, 2.) concrete, and 3.) after the fact. A merger is announced, for example, aftera deal is struck, and corporate earnings are shared after the quarter has closed. Even earnings estimates, which sound prospective, are generally a consensus of what people have already published.
Today’s financial data is no longer after the fact.
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The alternative data revolution
Like the name suggests, alternative data comes from an array of new and diverse sources. It includes live satellite imagery and heat maps to global shipping feeds, social media posts, and everything in between. These datasets almost always come at a higher frequency than the more traditional filing and price data. The immediacy and volume mean more opportunity for a competitive advantage—as an industry we are quickly moving from the early adopter into the early majority phase of alternative data—but it also means wrestling with data that is cumbersome, unstructured, stubborn to work with, and expensive to store.
Using legacy systems can make it difficult to keep up with the pace of ever increasing data, putting more pressure on IT teams, resources, and budgets. Limiting data to a manageable load, however, now means limiting your scope for alpha as well.That is why, unsurprisingly, we are seeing more clients turn to cloud environments. Cloud computing platforms not only have the capacity and infrastructure needed to explore unlimited datasets to follow your ideas, they also allow you to test those ideas faster. A test that would take a month on existing infrastructure, for example, could be scaled up in the cloud and completed in a matter of hours. Multiple this across your entire portfolio and suddenly, making the move to the cloud seems more attractive than it might have done just a few years ago.
For many investment companies used to managing their data resources locally, however, making the move to the cloud can seem daunting.In fact, the questionI hear most often is “What goes first?”The important thing is just to get started, but here are five considerations that can help you make that first step.
1) Start with Research
Many investment firms start their cloud migration with their research arms, which serves as a natural fit that offers immediate benefit. Cloud capacity and infrastructure speed up the research process enormously, increasing the group’s ability to sift through data, iterate and test ideas, and get to market quickly. Starting with research means you see bang for your buck almost immediately.
2) Use the Cloud to Attract Talent
Cutting-edge infrastructure helps you differentiate and attract talent. Internal IT teams, for example, can focus on supporting business-centric problems, such as building applications that can optimize a portfolio vs. spending time on patch updates. Quants want to be able to test their ideas quickly and utilize the latest in AI and machine learning to build their algorithms. All of this is dependent on IT infrastructure. If you don’t have the data environments to do the work that will attract these minds, you’ll be left behind.
3) Cloud Security is No Compromise
Trusting IT security to a third party used to be a big concern, but that has largely been addressed. Large firms around the world have tested and are comfortable with the security processes put in place by the leading cloud providers. Companies like Microsoft, Amazon, and Google have some of the strongest and most stringent protection available and the resources they deploy to adapt and stay ahead of security challenges dwarfs anything a single investment firm can do on its own.
4) Choose Your Data Wisely
The challenge for investment managers is not figuring out which data companies offer the best information, but rather which data feeds have the coverage, history, and frequency they require. It is easy to become overwhelmed with so much alternative data at our fingertips. Not all datasets are created equal and finding a trusted curator can help you whittle your options down to a manageable range you can test. The good news is, a cloud-hosted environment means you can run your tests, figure out what works (and what doesn’t), and incorporate it into your models faster.
5) You Can’t Do It Alone
Perhaps the most important thing to remember is that you can’t do it all yourself. Even the biggest players today cannot take on all the tasks required to make the most out of alternative data. When you look for a cloud provider, you should look for a company that can augment the resources and skills you have internally. Ask yourself: what enhancements to your internal capabilities will drive efficiency? What are the roadblocks? And then find a provider that can offer those enhancements and remove roadblocks on your behalf.
Alternative data feels urgent thanks to recent media attention and the emergence of new data companies. Like many revolutions, it has built up steam over time and now is moving quickly. Capitalizing on it means being nimble enough to move fast and having the right internal and external infrastructure to support your team as it inevitably shifts into a more data-driven environment.
Alternative data will not be alternative for long. Are you ready?