More hedge fund managers are using alternative data to gain a competitive advantage, said results of a new survey from the Alternative Investment Management Association and SS&C Technologies.
AIMA and SS&C define alternative data as "unconventional or non-market data that doesn't fall within the realms of traditional financial and economic data," such as data from consumer spending, weather patterns and satellite imagery.
Of the 100 global hedge fund managers surveyed, 53% use alternative data, with 25% of those managers having used this type of data for more than five years (which the survey defines as "market leaders"). The remaining 75% of those managers have been using alternative data for less than five years (defined as "rest of the market").
The increased use of such data is also partially due to that data being increasingly more available. The number of alternative data providers has now grown to more than 400 in 2018 from just 20 in 1990.
"The world we live in is becoming more and more digitized 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," AIMA CEO Jack Inglis said in a news release announcing the survey results. "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."
According to the survey, 69% of market leaders use alternative data to help them generate outperformance, vs. 44% of rest-of-market managers that have been using such data for less than five years.
Of the market leaders surveyed, 23% use such data to help improve their risk management processes, compared with 36% of new users of alternative data.
More than half (54%) of market leaders find it difficult to source quality alternative datasets vs. 62% of the rest of the market. Meanwhile, 20% of market leaders reported regulatory and compliance challenges vs. 15% for the rest of the market.
"There is tremendous potential for hedge fund managers to use alternative data to support and improve their investment strategies," said Michael Megaw, managing director, regulatory analytics and data at SS&C, in the news release. "As the markets evolve, we see a lot of opportunity for technology innovation to make insights from alternative data actionable and seamlessly integrate them into investment processes. Technology can also help mitigate the regulatory challenges brought on by alternative data, ensuring funds can keep up with best practices."
The survey also reveals that 62% of market leaders and 87% of the rest of the market believe that improvements in the reliability and relevance of alternative data are needed before alternative data become more broadly accepted within the industry. However, most managers surveyed (61% of market leaders, 82% of the rest of the market) expect this to happen within the next five years.