Cost of ‘alternative data’ seen as prohibitive

Investors want more access to less common sources of information, such as private company and real-time data, but they face hurdles in doing so, finds Greenwich Associates.
Cost of ‘alternative data’ seen as prohibitive

Fund managers used to rely chiefly on research from their sell-side trading counterparties, but today they have as much real-time access to news and information as their dealers. But that means finding an edge is harder – and more expensive – than ever, noted Greenwich Associates in a report released this week.*

Indeed, the biggest obstacle to obtaining ‘alternative data’ – such as logistics or private company information – is the high cost, said asset managers surveyed for the research, 'Alternative data for alpha' (see first graph below).

Other issues include that investment firms’ internal procurement processes are too slow and that they lack the time needed to evaluate the data. Moreover, such information is often incomplete or incompatible with data analysis systems, and management is often not convinced of the data’s value.

What is alternative data?

  • Business performance information that shows public companies’ payment experience (that is, how they pay their creditors).
  • Business performance of private companies and how it influences and predicts that of public companies.
  • Corporate linkage providing a clear picture of total risk and opportunity across related businesses.
  • Sentiment analysis of social media.
  • Satellite imagery of traffic flow, crop growth, cargo ship movements, etcetera.

Source: Greenwich Associates

Hence, said Greenwich, providers of this information need to show the potential value/alpha created when the data is applied to trading strategies. Take-up will also be quicker for vendors that demonstrate the quality and completeness of their data – and make it easy to integrate into asset managers’ trading and analytics systems.

The research was based on a survey of 46 asset managers and 26 hedge funds in Europe and the US. Certain hurdles are no doubt exacerbated in Asia, where transparency is harder to come by in certain markets – but equally that means finding an edge there may be easier.

Crowd-sourced research and social media sentiment are now widely analysed, but private company data – already widely used by hedge funds – is becoming more sought after by large investment firms, noted Greenwich.

Such information is highest on traditional asset managers’ wish list (see second graph, below). Meanwhile, hedge funds are most interested in accessing evaluated prices, likely due to their use of harder-to-price financial instruments. Both types of investors are also very keen to obtain logistics data.

Not alternative for long

Overall, data quality, completeness, cost and accessibility are improving, said Greenwich – which of course means alternative data will only be alternative for so long.

“Just as cloud computing is on its way to being called simply ‘computing’, private company, social media and satellite data, among others, will also soon lose their alternative label,” noted the report.

The upshot: it’s probably worth shelling out for hard-to-get information now, before everyone’s using it.

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