This article was originally published by Value Walk on September 18, 2017
Alternative Data is not going stay alternative; the analytics behind it is too revolutionary to stay in the hands of the few. The insight will become pervasive, leaving fund managers to look elsewhere to answer the questions no-one else is asking
The proliferation of economic and business data and the technology advances behind its creation, storage and analysis are facilitating the latest iteration of non-financial research to support investment decision making. The underlying premise is nothing new; resourceful portfolio managers have long utilised alternative sources. Industry regulatory evidence, SMEs and proprietary networks are some ways in which they have sought out creative sources of insight to inform their investment theses.
From a pure information acquisition perspective, the enthusiasm surrounding ‘Alt Data’; sources such as web scraping, geo-locating, weather and satellite imagery, is justified. The opportunity to harness millions of pieces of information collected in real-time as individuals go about their daily online and offline lives, analysed, synthesised and aggregated to uncover signals and identify key trends is monumental. The information age is transforming into the intelligence age and data analytics is revolutionary for the investment research process, just as it is for so many areas of society.
Whilst there is little doubt the industry will continue to accelerate significantly, currently data veracity and the sheer cost of meaningful implementation and in-house analysis are holding many back. Barclays found only 24% of Hedge Funds questioned are currently using Big Data in their investment decision making and IBM report 1 in 3 still do not trust it to make decisions on investments. The reality is that at this stage, only very few are leveraging it to generate actionable insight.
In the long run however, datasets will become widely accessible and current ‘Alt Data’ will not remain alternative. Technology driven, non-financial understanding will play an increasingly prominent part in assessing underlying business value, not just for investment purposes but across many other industries and markets. SOP promotion, management, delivery and access improvement, source explosion and cost reduction will lead to the early adopters being caught by the laggards and ultimately the value and proprietary nature of the insight will disappear (if the SEC do not regulate it out beforehand). The questions asked most frequently will drive the direction of the new datasets and the industry will commoditise, putting it at risk of group think and therefore spotting data generating alpha before anyone else will become increasingly difficult.
Where data is inconclusive or requires corroboration, human led information acquisition and intelligence analysis provides the opportunity to uncover actionable insight in a highly bespoke and targeted manner. Executed across developed and emerging markets, online and on the ground situational awareness deliver valuable perspective. It can be as simple as understanding the timeline of a construction project based upon up to date images and the input of an engineer (perhaps where satellite imagery was not definitive), to researching the physical, cross border supply chain to assess points of interest when there may be possible regulatory or value concern. Mapping networks and understanding board member relationships through online investigative techniques can be particularly useful when planning activism strategies, for example.
Furthermore, developing and opaque markets do not provide the same capacity for Big Data analysis; internet penetration and the collection of data is greatly reduced so human based alternative research often remains the most insightful course. Observation of isolated assets (perhaps a mine or offshore platform), difficult to analyse production sites (geographically or politically), or during prolonged projects (noting changes over time) can be invaluable, not only to observe and report in real time but to give context and on the ground awareness of wider influences. Alongside human based interaction and enquiries to understand intentions, made in a transparent and tradable way, these intelligence solutions can inform on a variety of situations where data warehouses and algorithms cannot.
Incorporating online intelligence expertise, open source investigations can uncover unexpected and useable material as individuals and companies ever increase their online profiles. And in many cases, emerging market comprehensive due diligence and risk management continues to rely on offline sources and therefore investment decision making must be as thorough.
Alternative Data is not the silver bullet, much in the same way expert networks or the Bloomberg terminal were not the final say in uncovering proprietary, tradable information. But within the mosaic of alternative investment research, it will be the bespoke, human led intelligence and analysis, alongside ‘Alt Data’, that will continue to look where no-one else is looking and provide answers ahead of the competition.
15 September 2017