This article was originally published by Value Walk on July 15, 2017
In Emerging Markets, strategic intelligence firms can provide answers using Alternative Data where big data cannot compete
The pace of growth in alternative data supply signals a broadening acceptance that looking beyond P&L in a systematic way supports overall alpha generation. Squeezed by the increasing enthusiasm for AI backed systems and pressure to justify fees in a lower returns environment, discretionary managers see ‘Alt Data’ as one differentiator to help attract and retain investors in a highly competitive hedge fund market.
Alternative Data is by definition fundamental research, reliant upon high internet penetration in markets to collect, read and assess information at a significant enough scale to provide actionable insight for investment decisions. This makes US and European markets prime for data exploitation of this nature, the very markets where alternatives to traditional financial analysis are increasingly necessary, and supports funds in ultimately sustaining higher levels of return, let alone their own existence.
Emerging markets do not provide the same opportunity for data mining; the inherent lack of internet penetration and poor access to sources of information lower reliability and impede performance. The need for diversification of information still exists however, and whilst this has typically been in the context of mitigating risk when deploying cash, increasingly it will be required in pursuit of enhance investment performance.
Who are the ultimate owners of the target company and what political links do they have? What is the true state of isolated assets? Does corruption exist within the supply chain? What threats are posed to the company from local actors, and how can they be mitigated?
Private inward investment is well used to employing strategic intelligence consultancies to undertake enhanced due diligence and market entry services in all corners of the developing world. The additional resource deployed into offline information acquisition to thoroughly comprehend both companies and individuals is increasingly fruitful in determining fact from fiction. It enables analysts to evaluate in theory and in practise and has protected some of the very largest deals to have happened, or not happened, in the last 20 years. On the ground, situational awareness collected by regional specialists cannot be equalled when navigating at this level of uncertainty.
But now, these information services are being re-applied to deliver alternative, actionable insight for short term funds, enabling the realisation of full potential in both active positions and target investments. What has been the operational impact of an activist merger in a foreign jurisdiction? How does the P&L match infrastructure capability in a frontier market? When has a prospector struck in an isolated environment? What is the relationship between particular board members? Global hedge funds and those diversified in event driven, activist and special situation strategies are able to utilise this expertly collected information to bolster thesis validity arguments or appraise claims in far off regions.
With the growth of M&A activism and requirement to understand the social landscape and implications of particularly positions, a holistic approach during the planning phase and close to real time updates when executing can, quite literally, pay dividends. And whilst the output takes on a more strategic nature of information than perhaps what alternative data analytics seeks to produce, it supports the objective of increasing ROI for hedge funds.
And of the providers of this information. Long cast as the dubious pretenders selling style over substance, intelligence consultancies have been forced to grow up by market pressures of their own. The significant value add that they provide when identifying and mitigating risk has in the past been masked by overstatement of ability and a reliance on secrecy to mask inadequacy. But much has changed. The injection of technology and an ever-increasing cross section of experience and expertise in personnel is endearing the market to asset managers in markets globally. Quality of process, strict regulatory compliance and a culture of greater transparency has led to an evolution and maturing of mindset, and the intelligence products are the better for it.