Alternative data is a topic of growing interest among quants, research teams, and data scientists; given that this non-traditional information about companies, societies or economies beyond the usual information provided by banks can reveal unique insights to be leveraged for investment purposes. Yet, even the best raw data cannot be useful in isolation, and requires processing and context.
During the 'Making the most of alternative data' webinar held on November 18 in partnership with data solutions provider FactSet, a panel of experts considered which alternative sources are truly useful, and how they can be benchmarked against and integrated with more traditional data sources. Panelists noted the importance of investing in a data management solution that is both forward-looking and scalable, given the pace of change in the market.
Additionally, while not yet major users of alternative data, institutional investors in Asia are beginning to recognise its utility when attempting to quantify environmental, social and governance (ESG) factors - which would be difficult to assess objectively without independent sources of real-world data. For example, in addition to looking at credit reports or ratings provided by banks, financial services may opt for data that includes transaction records, online sentiment, consumer receipts or public data, providing a more holistic picture of a company or sector in question.
Puneet Singh, the Asia Pacific head of equity quant research at Societe Generale Corporate and Investment Banking:
One way investors can gain value via alternative data is by using natural language processing in the news flow to provide ESG insights, Singh said. The technologies can, for example, analyse news articles to derive sentiment surrounding a company’s ESG efforts.
"The utility of alternative data sets has been fairly limited [to date] with only the very advanced clients adopting its use,” he said.
"The investment process must have some fundamental underpinnings … this can be augmented by using alternative data, in terms of sentiment or [by identifying] risks or issues of the stocks through high frequency news flow."
Marko Milek, head of data and analytics for Asia Pacific at State Street Alpha:
To make the most of alternative data, asset owners first need to identify the business process, operations and outcomes they are trying to achieve, said Milek. They can then consider the scope and underlying datasets required, before settling on a solution that is in line with the purpose of their particular organisation.
“There is a lot of interest in economic attributes that can be calculated from non-traditional sources that can impact foreign exchange moves,” said Milek, noting that alternative data could prove useful to analyse behavioural flows.
“There has been discussion around cloud-based solutions – which accelerated as a result of the pandemic. Firms that withstood the challenges of work-from-home are those who adopted cloud-based approaches, which provided remote access to end-users at speed,” Milek said. “Anyone thinking about investment that is not cloud-first or cloud-ready, should really think about how long will the alternative be successful.”
Michael Rhodes, vice-president of content and technology solutions at FactSet:
“ESG is emerging as one of the key areas of focus across our client base here in APAC,” said Rhodes. “Research has demonstrated that a firm that scores highly from an ESG perspective are able to deliver more broad based and long-term value to investors”
Rhodes observed that 70% of global investment companies are still in the early or exploratory stages of alternative data use and will require guidance on how it can be used alongside traditional data before rolling it out. “Until we get further along the curve, more explanations on how to arrive at the outputs would be needed,” he said.
Investors can also use alternative data in conjunction with current research and investment processes.
"There are some good examples of how clients have integrated alternative data with their own proprietary content or traditional data," said Rhodes, noting that these include investors "comparing web-scraped data providers, or using sentiment for fundamental analysis during earnings season to look at not just one report in isolation but to compare sentiment over several quarters".
To learn more, watch the full webinar on demand here.
FactSet and AsianInvestor will partner again in an upcoming webinar going live on March 23rd "The unique challenges of modelling equity risk in China" Register here. (The webinar will be hosted in Mandarin)