Over 80 per cent of hedge funds are using alternative data in some capacity, according to a new survey fro law firm Lowenstein Sandler’s Investment Management Group.
The report – Alternative Data = Better Investment Strategies, But Not Without Concerns – was authored by Peter D Greene (pictured), partner and Vice Chair of Lowenstein’s Investment Management Group, with contributions from Benjamin Kozinn, a partner in that group.
“It is not surprising to me that an overwhelming majority of funds are using alternative data,” says Greene. “What is interesting is how funds of various sizes are using it and how they plan to expand their use in the future. In a changing industry, it is more important than ever to learn what alternative data can do, while also acknowledging the limitations and concerns that come with using such data.”
Completed by C-level executives, data scientists, equity analysts, portfolio managers, and legal/compliance officers in the private funds industry, the survey assessed funds’ use of alternative data. Funds were grouped by size – less than USD500 million, USD500 million to USD5 billion, and greater than USD5 billion – to determine how data use, and concerns about it, differ at varying levels of asset value.
According to the survey results, 82 per cent of hedge funds are already using alternative data in some capacity, and 75 per cent of respondents are using it to make better investment predictions. With more funds using alternative data, the results evidence an increasing interest in using newer data sources such as web scraping and biometrics to stay competitive. But, factors such as new regulations and privacy laws, cost and time investment, and the ability to distinguish relevant information from large volumes of data could stymie those plans for growth.
The report reveals that ninety-eight per cent of respondents who use alternative data utilise it in combination with fundamental analysis to make investment decisions.
Respondents also selected consumer transaction data, followed by data gathered through social media and cloud platforms, as the most popular alternative data sources for the next six to 12 months–but only social media is expected to grow in popularity.
Fifty-seven per cent of respondents meanwhile, expect to use web scraping as a data source within a year, a jump from the current 49 per cent using it. Similarly, 32 per cent use biometric data now, and 45 per cent expect to use it in the future.
In addition, eighty-one per cent of respondents’ organisations plan to increase their budgets for alternative data. Of those, the majority plan to increase budgets by 11-25 per cent.
Most notably, with more than four out of five funds already using alternative data, the use of new sources such as biometric data and web scraping is expected to increase in the coming year – but new laws and regulations surrounding biometrics, geolocation, and other privacy concerns are wild cards, and they could change the trajectory of data sourcing.
The main reason respondents use alternative data varies by fund size. The primary use for funds with less than USD500 million in assets is to understand competitive markets. For USD500 million to USD5 billion funds, the top use is generating greater insights into a particular sector, industry, or issues. For those worth more than USD5 billion, the top use is to develop unique investment strategies.
In addition, the majority of respondents (81per cent) said their organisation plans to increase its budget for alternative data this year, reflecting the industry’s increasing interest in – and need for – alternative data.
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