A Building Year for ‘Alt’ Data
Incorporating alternative data into investment strategies remains a niche play for many asset managers, according to one industry consultancy.
The larger asset managers, with billions of dollars of assets under management, are still whiteboarding and talking about alternative data in terms of proof-of-concepts, Bijesh Amin, co-founder of Indus Valley Partners, told Markets Media. “They have an established way of making money whether it’s long-short equities or global macro strategies. They’re not looking to change their established franchises.”
However, geopolitics, quantitative easing, and the new Trump administration likely will be major drivers behind investment strategies throughout 2017. Amin does not discount the interest in alternative data, but it is the small, nimble funds with anywhere between $50 and $100 million AUM that are making advancements in this space, he said.
“Larger investors are willing to invest $10 to $15 million with these firms on an experimental basis with the hope that it would be a precursor to something more speculative in the next five years,” he said. “Looking at the next 12 months, I don’t think there is gong to be a major shift in sentiment regarding investment strategies from investors.”
The growth of alternative data has led many smaller firms to use genetic algorithms and neuro-linguistic processing to find new correlations and potential trading signals from alternative data.
It’s not a new strategy, noted Amin. “People who have been in the industry like Renaissance Technologies founder James Simons has been doing this for decades and making money at it.”
The new wrinkle is how e-commerce has changed the nature of primary research for many institutional investors.
“I have an analyst friend who covers semiconductors and part of his research he would enter an electronics store to see how people were using their smartphones, how many units the store sold and extrapolate the data and base a thesis around it,” Amin explained. “Now with retailers like Amazon and Wal-Mart, that data could be accessible online.”
Amin also sees newer technologies like drones playing a greater role in collecting alternative data.
“You could get a drone and fly it over a chain store’s car park to see if the car park is full at peak times,” he said. “That could be correlated with the quarterly earning numbers to see if the what the company is saying is accurate.”
But widespread adoption of such strategies and technologies are still at least few years away for most asset managers, he added.