The current pandemic sweeping the world is proving to be an excellent test for alternative data to prove its merits. With developments surrounding the spread of the Coronavirus happening so quickly, the situation emphasises the importance of data. The virus has led to a surge in demand for new forms of data, including that derived from alternative data from investors, governments, and central banks to interpret how the pandemic is impacting industries and countries around the world. Written By Tom Kehoe (pictured), Managing Director, Global Head of Research and Communications, AIMA
There is a treasure trove of information beyond data derived from balance sheet information, company records and government data that one can source from traditional structured data. help best interpret the spread of the virus, rather than relying on sometimes weeks old information from national medical authorities, companies are examining atypical data from real time or close to real time analysis. This includes creating interactive maps to identify at-risk groups to the virus, and other information sets that can help guide on testing, containment, and health responses.
Purchase receipt data from credit card transactions, social media sentiment from internet usage/web scraping and geolocation data derived from satellite images are all being used to help scientists, governments and investors get a real time insight into how countries are reacting to the pandemic. For investors, the immediacy of these data sets in comparison to the information lag from using traditional forms of data is proving particularly useful during periods like we are currently witnessing, when markets cease to function normally. One can access geolocation data in close to real time. In comparison transaction data can take as much as 5 days to come through.
Data is a big disrupter now. 90% of the world’s data available today was only produced over the last two years – a truly staggering statistic. The pace is only likely to accelerate more, the opportunity set for investors is compelling.
Gaining a legitimate information edge is what helps hedge fund managers meet their clients’ investment needs in both efficiently managing risk and generating alpha. Hedge funds have always been at the forefront of embracing change and constantly innovating to deliver superior returns to their investors.
Amidst increasing curiosity around the use of alternative data by hedge funds, AIMA together with SS&C Technologies published “Casting the Net”, the most comprehensive survey to date examining how hedge funds are using alternative data. With insights from some of the world’s pioneers of alternative data use, the paper also offers some useful practical steps for managers looking to deploy alternative data whether you are a multi-billion-dollar investment manager or a start-up.
Throughout the current disruption there are examples of hedge fund managers successfully employing alternative data in navigating market conditions.
One Asia-based manager used alternative data to understand how markets may react and, importantly, how to position the portfolio. In particular, it has combined information on past outbreaks with web crawled data which contained internet searches and insights about road congestion, flight schedules and test-kit availability. The manager subsequently delivered outstanding returns to investors as markets turned more volatile and declined considerably during the first months of the pandemic.