Alt data: the fuel of the future?

There are two big reasons for the investment and financial markets sector to feel positive about the future. The first is the unprecedented explosion of alternative information offering exciting new opportunities to build into existing quantitative finance models to generate new alpha – that ‘secret sauce’ or highly prized extra value.

The second is that the industry is fast developing its sophistication and accuracy by better harnessing new AI and ML technologies to analyse the ever-greater volumes of alt data that look set to power its future. With adoption of alternative data growing, financial services firms are learning fast where to find quality alternative (alt) data sources to help inform their investment decisions and achieve a competitive edge.

The AIMA (Alternative Investment Management Association) states that more than half (53%) of all investment firms are now tapping alt data. And they’re stepping up their resources. The Financial Times reports that BNP Paribas Asset Management, for example, now dedicates about 10 per cent of its market data budget for alt sources. That’s up from an “insignificant” amount five years ago, according to its chief executive Frédéric Janbon. The number of alt-data providers has also grown — with more than 400 currently active providers, compared to only 20 in 1990, says AIMA. What is alt data? In a nutshell, it is any ‘non-standard data set’. This could be satellite imagery, social media posts, geo-location tracking, website visit statistics, retail traffic figures, shipping numbers or IoT data. Lately ESG — environmental, social and governance — data has been the subject of much attention. It offers firms a route to quantifying, through three main criteria, how sustainable a company may be.

All of this is investor gold dust that just isn’t available from stock prices or company filings. Alt data offers infinite possibilities for quant traders for sentiment analysis, predictive analytics, market surveillance for identifying financial crime and research verification. Its shiny appeal is its potential for an information advantage over the market for investment management decisions. In a world where any edge, even a short timing advantage, may produce a more effective trading signal, algorithm, or investment model, it is worth pursuing. Many firms are going further. They are triangulating alt data with traditional data sets in order to create unique derivative insights or to reaffirm a trading signal or trend. But it requires industry knowledge and quantitative talent (with a deep understanding of statistics, mathematics, and computer science) to successfully access and analyse vast volumes of big data and turn it into machine-learning investment models for fund managers.

The bottom line is you need to have the combination of humans directing data machines and humans tapping into their own industry instincts to target investment decisions. According to AIMA, 48% of larger firms (with more than $1 billion in assets under management) are now investing in tech, specifically in alternative data. The realm of the measurable has expanded and its trajectory is clear. The Global Alternative Data Market size is expected to reach $11.1 billion by 2026, rising at a market growth of 44% CAGR during the forecast period, according to the latest "Global Alternative Data Market by Type, Industry Vertical and Region: Industry Analysis and Forecast 2020-2026" report. For the investment sector, use of alternative data may as yet still be in its infancy. But as the expertise and technology to use it grows, so will its application.