Schroders Taps Alternative Data
The use of alternative data is no longer just the province of quantitative investors as more fundamental investors are incorporating it into their research.
Global asset manager Schroders hired its first data scientist in September 2014 to explore the use of alternative data and has since grown its data insight and analytics team to 27 data scientists who support the firms 60 investment teams.
The firm is not trying to ‘out-quant’ the quantitative trading shops like Two Sigma or Renaissance Technologies, but rather find alpha where quantitative investors are not looking or cannot incorporate within their trading methodologies, said Mark Ainsworth, head of data insights and analytics at Schroders.
Ainsworth separates alpha derived from alternative data between data that uses breaking news as a catalyst for trading signals, and data that enhanced the view provided by fundamental analysis.
For Schroders, the focus is on the latter. “The data that does not fit into our analysts’ spreadsheets is the gap that we are trying to fill,” he said.
Ainsworth cited a situation where one analyst wanted to know how many stores Ladbrokes and Coral, the second and third largest UK bookmakers respectively, would need to close as a result of their planned 2016 merger prior to the event.
The analyst received estimates that bookmakers would need to close between 100 and 1,500 stores to meet the UK’s Competition and Markets Authority’s regulation that ensured that the merger would not reduce competition at the local level. “The estimate was useless,” noted Ainsworth.
Ainsworth’s team measured the required radius around each Ladbroke and Coral store to see which would trip the CMA’s regulation.
“We found 400 stores that did,” he said. “Later that year, the CMA came out with its estimate, which was between 350 and 400 stores.”
“Quantitative investors would have never have discovered that,” added Tammer Kamel, founder and CEO of alternative data aggregator Quandl.
However, quantitative investors still represent the largest segment of Quandl’s customer base. “Alternative data is becoming a known quantity,” he said. “Interest is one thing, and adoption is another.”
Unlike quantitative investment firms, which are accustomed to incorporating signals from a variety of datasets, fundamental investors face a much heavier lift when choosing to implement its use.
“Human resources and paradigm adoption are hurdles,” said Kamel. “It is similar to hiring software developers. Where do they sit within the organization?”
For Schroders, 26 of its 27 data scientists share the same floor as the firm’s analysts in its London office. The remaining data scientist is based in Schroders New York office.
Sourcing alternative data sets, which can range from tens of dollars to $250,000 annually, and create the necessary infrastructure are not the greatest challenges according to Ainsworth.
It is the data scientists, he said. Viable candidates must have the necessary mathematics and technological skills to analyze the data and write algorithms.
“The challenge is their domain knowledge,” Ainsworth added. “It has to do with the companies in which we invest, which could be anything.”
Enterprise Access Point, the firm’s web-based data marketplace, now includes over 60 third-party providers.
Deal combines Knoema’s knowledge management platform and data repository with Adaptive’s alternative data.
AI and machine learning have supplanted trading speed as a differentiator for capital markets firms.
Focus areas include listings, ESG data, and sustainable bonds.
Is it time to revisit and expand the Gramm-Leach-Bliley Act to include fintechs?