The Alternative Investment Management Association (AIMA), in collaboration with fund services and technology provider SS&C, has published an in-depth report which explores the rate of adoption of alternative data within the global hedge fund industry.
‘Casting the Net: how hedge funds are using alternative data’ was informed through a comprehensive survey of 100 hedge fund managers globally, accounting for an estimated total of $720bn in assets under management. The report includes insights from conversations with industry leaders and alternative data providers.
Alternative data is unconventional or non-market data that doesn’t fall within the realms of traditional financial and economic data. Examples include data from consumer spending, weather patterns and satellite imagery. Due to factors such as the increase in the amount of data itself and advancements in data science, the number of alternative data providers has now grown to over 400 (in 2018) up from just 20 in 1990.
Of the total number of managers surveyed, 53% use alternative data, with 25% of these considered to be ‘market leaders’ or hedge fund managers that have been using this type of data for more than five years. The remaining 75% of users have been using alternative data for less than half a decade.
Gaining a legitimate information edge is what helps hedge fund managers meet their clients’ investment needs, helping to manage risk to generate alpha efficiently. The proliferation of alternative datasets offers new opportunities (and challenges) for managers who want to remain a step ahead of the competition.
The analysis revealed concerns around regulatory and compliance challenges on the horizon, including data owner consent, privacy issues, intellectual property rights infringement, consumer protection and practices that could provide an unfair advantage. Frameworks around the governing of data are changing rapidly.
Jack Inglis, CEO of AIMA, commented: “The world we live in is becoming more and more digitised and, as such, the amount and types of information that hedge fund managers can use to either research investment ideas or improve their understanding of current portfolio positions will also expand.
“Hedge funds have long been the innovators of the asset management industry and the first to adopt new approaches to technology, so, unsurprisingly, many are already using alternative data to research investment ideas and improve their understanding of current portfolio positions. The immediacy of alternative data, in comparison to the information lag from working with more traditional data, is particularly helpful in moments like this when markets cease to function normally. There is already a great sense of optimism amongst hedge fund managers enjoying the benefits of a deeper knowledge of trends; however, managers know further challenges are ahead as they tackle how best to gather this type of data and continuously derive something meaningful from it.”
AIMA, SS&C, Hedge Fund, Jack Inglis, Cayman Islands