Foreword
The global economy and financial markets are always changing. With them, the information that hedge fund managers can gain from analysing the world around them also evolves. Consequently, the tools needed to extract data from such information need to adapt – successful investing, irrespective of what strategy or style one employs, depends to a good extent on gaining and maintaining a legitimate information edge over the rest of the market. To put it differently, for hedge fund managers to meet the investment needs of their clients, they need to have a greater understanding of how the world functions than their competitors.
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. 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.
As a concept, alternative data is not new: for thousands of years market savvy business people have tried to understand their trading environment by looking at the world around them through different lenses and, from their observations, extracting data that, although not conventional, helped them to navigate the market successfully.
However, in recent years, enabled by the technological advancements across a number of industries, accessibility to alternative data sets has improved tremendously: with a growing number of alternative data providers, hedge fund managers now have access to a large number of non-traditional data sources, such as satellite imagery, social-media trends and weather patterns.
The aim of this publication is to offer an in-depth analysis of this topic, as well as to invite all stakeholders interested in how alternative data is being used by the hedge fund industry to further discuss its broader adoption. In it, you will discover how widely adopted alternative data is within the hedge fund industry, what are the main uses that managers are employing alternative data for, the opportunities and challenges that these data sets present and what the future holds for alternative data within the hedge fund sector.
We would like to thank AIMA’s research committee for their valuable input and for taking the time to discuss these findings. We would also like to thank the various asset managers for their generosity in contributing the several testimonials included throughout this paper, and to Eagle Alpha for their insight. Finally, thank you for taking the time to read this paper.
We would love to hear your thoughts.
Jack Inglis
Chief Executive Officer, AIMA
Michael Megaw
Managing Director, Regulatory Analytics and Data, SS&C Technologies
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Jack Inglis
CEO
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Michael Megaw
Managing Director, Regulatory Analytics and Data, SS&C Technologies
Introduction
Change is the only constant in the known universe. Nowhere else is this truer than in the world of asset management, especially in alternative investments. Within this space, hedge funds continue to adapt to an evolving landscape of challenges and opportunities. Among other things, this includes adopting novel technologies for managing risks, researching investment ideas and, ultimately, generating alpha.
The Alternative Investment Management Association (AIMA), being well-positioned at the heart of the industry, has been witnessing this transformation first-hand. Moreover, AIMA has been assessing the impact of technology on hedge fund managers and their clients through a series of in-depth research papers, including the landmark publication “Perspectives”. This paper continues AIMA’s work in this space and, in collaboration with global fund service provider SS&C, it looks at how hedge fund managers are using alternative data.
As a concept, alternative data is not new. Indeed, it goes as far back as ancient Babylon when merchants used measurements of the Euphrates’ depth and flow to inform their decisions in trading various commodities, as they realised that these variables were correlated with market supply3. However, what is new in recent years is the increasing level of accessibility to this type of data. With a growing number of alternative data providers, hedge funds have access to a myriad of data sources, such as satellite imagery, social-media trends, and consumers’ shopping behaviour.
Considering how fast technology is moving, those that fail to adapt risk losing a potential advantage in the competitive race to deliver the rarest of returns – alpha. Consequently, most managers are in the process of updating their investment processes and business models in order to accommodate the growing amount of alternative data.
We hope you find this publication insightful and useful and we invite other stakeholders to join the conversation around alternative data within the hedge fund industry.
Methodology
In order to collect the necessary data, we ran a survey to which 100 hedge fund managers responded, managing a total of about $720bn in assets. Additionally, we have collected insights from conversations with managers and alternative data providers.
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"Casting the Net" is available to Members and Non-Members of AIMA. For more information about the report, contact AIMA's Global Head of Research and Communications, Tom Kehoe, at [email protected]