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Hedge funds’ use of alternative data tipped to surge, new industry study finds

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More than half of hedge fund managers are now using alternative data to gain a competitive edge, according to a wide-ranging new study into alt data trends by the Alternative Investment Management Association and fund services provider SS&C.

The report, ‘Casting the Net: How Hedge Funds are Using Alternative Data’, explores the ways in which hedge funds now utilise alternative datasets – defined as unconventional, non-market and non-traditional economic and financial information, such as satellite imagery, social media trends and weather patterns – in their businesses.

The study, jointly published by AIMA and SS&C today, quizzed some 100 hedge fund managers globally, collectively managing about USD720 billion in assets across strategies, including equity long/short, relative value, event driven, macro and CTAs, among others.

More than a quarter of those polled (27 per cent) manage more than USD5 billion in assets, while 25 per cent of those surveyed are considered to be “market leaders” – or hedge fund managers that have been using alternative data for more than five years.

The report found that well over two-thirds (69 per cent) of those market leaders now use alternative data to generate outperformance, while close to a quarter (23 per cent) of them employ it for their risk management processes.

The research explored several case studies and manager interviews to delve further into the growing use of alternative data among the hedge fund community.

It suggested that with climate change now a major global policy challenge, climate-related data is likely to become more relevant for hedge funds’ portfolio allocations, while ESG (environmental, social, and governance) signals are expected to become more prominent in hedge fund managers’ pursuit of alpha. It noted how some 10 per cent of survey participants are now using weather pattern data in their strategies.

Elsewhere, it examined how credit card data or footfall numbers may be used to analyse potential positions in retail stocks.

The study also considered the different ways in which various hedge fund strategies slice and dice new information. While fundamental mangers tend to use alternative data to reinforce their investment theses derived from traditional research processes, the quantitative and systematic firms approach it from the other end: employing more alternative data alongside traditional financial data to better shape their investment thesis.

Looking ahead, some 61 per cent of market leaders, and 82 per cent of the rest of the market, expect alt data to become more widely adopted among hedge funds in the next one to five years.

“While traditional sources of economic and financial knowledge, such as textbooks, industry literature and established data bases are excellent in providing a level-playing field for hedge fund managers, going above and beyond these commonly used sources is crucial for managers to remain innovative and therefore, to stay competitive,” observed Jack Inglis, AIMA’s CEO, and Michael Megaw, managing director, regulatory analytics and data, SS&C Technologies, in the report.

“In doing so, more and more alternative investment funds are adopting a ‘quantamental’ approach, a blend of fundamental investing combined with a more quantitative approach. Central to this new way of thinking is the emergence of alternative data.”

The report also looked at some of the challenges and hurdles facing managers in this space.

As the number of alternative data providers has surged in recent years, hedge funds now have access to a wealth of non-traditional data sources. But more than half (54 per cent) of market leaders still find it tough to source quality data, with 15 per cent of the market reporting regulatory and compliance challenges, while 77 per cent of market leaders said it is difficult to back-test historical data.

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