Top five trends in Alternative Data each vendor should know

AIMA and SS&C recently published the results of their survey, Casting the Net, How Hedge Funds are Using Alternative Data

The report offers insight into an otherwise opaque space.

We wanted to review the data from the vantage point of some of our clients, providers of Alternative Data and related products, and pull out the most relevant take-aways for vendors selling to Hedge Funds and other investors.

This summary does not substitute the full report, which can be downloaded here.

The report is based on a survey of 100 HF managers running a total of $720B, with 27 funds managing over 5B in assets. The report differentiates between Market Leaders and the "Rest" with Market Leaders being those managers who have used AltDAta for five years or longer.

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Let's dive in

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Insight 1: Over half of all Hedge Funds use Alternative Data, and 14% more are trialing datasets leaving just a third who do not use AltData.

Your most common clients will be plain vanilla US-based Long / Short Equity funds and Market Neutral strategies that also contain Quants. While larger tend to buy more data, the numbers are such that there are many more funds under 5B and they are going to be your most common target.

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Insight 2: If your prospect is already using AltData, this is a good sign, as most managers who use data use more than one dataset. As you'd expect, Market Leaders tend to use more data sources than relative newcomers. But over 77% of newcomers use more than one data source and 85% of Market Leaders use two or more. Some managers invests heavily into AltData as the survey found that 31% of Market Leaders use nine or more data sources.

Insight 3: The most common use for AltData was found to be as a tool to improve investment decisions. This may sound unsatisfyingly broad but it is telling that AltData is seen as having broad applications to the investment process by most managers. Strikingly, Market Leaders often rely on AltData for new idea generation (62%) and generating Alpha (69%). The rest of the market seem to be still figuring it out as only 44% use AltData for Alpha and most (85%) bucketed it into the more general usecase. One very important point of differentiation is the strategy the manager pursues. Quants use this data in a systematic way so for a vendor, it will be important to have breadth in their data. Fundamental strategies use data to inform their exsiting portfolios, so coverage numbers are going to be more important (what portion of their portfolio is covered by your data?)

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Insight 4: The biggest challenges managers face with Alternative Data seem to be similar with leaders and the rest of the market. Half of all managers using AltData claimed that having the right infrastructure to deal with data is an issue. This is not surprising given the recent meteoric rise of the sheer number of Alternative Data sources available to investors. Double-clicking into this challenge things start to diverge.

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Market Leaders tend to recognize that back testing new datasets is an onerous task, especially given they tend to have more data to back-test. Everyone experienced difficulty sourcing data but the rest of the market claimed this was particularly hard for them - given the resources needed to source and evaluate new data.

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Insight 5: The good news is, managers who use AltData recognize its importance to their overall value proposition.

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If you are an AltData vendor, it is important to keep these insights in mind when speaking to HF prospects. Know your audience - are they market leaders, what strategy are they running, what other data are they using, what are the challenges they are seeing? Knowing this will help you identify the right prospects and position your data products as a natural solution to their challenges.

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The full report can be downloaded here.

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