Trading Like A Hedge Fund With Alternative DataFeb 21, 2022
For the last several years hedge funds have seen a tremendous paradigm shift in how they source and implement data into their investment methodology. With increasing competition to beat the market index, hedge funds are gaining a competitive edge with alternative data.
WHAT IS ALTERNATIVE DATA?
Alternative data refers to non-traditional data that investors use to guide investment strategies. Traditionally investors may use fundamental or technical analysis when searching for discrepancies between price and value in the market. However examples of non-traditional data may include credit card transaction data, mobile device data, satellite imagery, social media sentiment, product reviews, weather data, web traffic, app usage and ESG (environmental, social and corporate governance) data. Some alternative data providers also track corporate jet flights, government contracts along with congressional trading.
Today, about half of all investment firms use alternative data, according to Bank of America in a recent study. It is highly likely that the trend of using alternative data will grow, as more firms have invested in new technology during the pandemic. A recent survey by AIMA, in conjunction with Simmons & Simmons and Seward & Kissel, found that 34 percent of hedge fund managers surveyed said their firms are newly investing in alternative data.
Hedge funds also use non-traditional data providers to collaborate their investment thesis. When a fund manager hypothesis that a particular stock will outperform its competitors, corroborating data should support that thesis. How? By showing an upward spike in web searches to the company’s website, for example.
Additionally, new data could indicate a marked improvement in the company’s effectiveness at turning unique website visitors into paying customers. But what if it picks up on a sharp drop-off in a company’s consumer interest as compared to its competitors? Then a fund manager may need to look out for an earnings miss.
That said, some categories are more established than others. Here are a few must-know types of alternative data.
WEB TRAFFIC AND APP USAGE
Is a software company’s application attracting new users or dropping them? Are sites in a particular product category suddenly seeing an influx of visitors? The answers to these kinds of traffic-data questions are extremely valuable to traders, so it’s no surprise that web and app analytics services have become de rigueur tools in the alternative-data toolbox.
A noteworthy player here is SimilarWeb. The service’s sophisticated data sets, available through a user-interface platform or direct API, encompass some 100 million sites and nearly five million apps, with coverage stretching back to 2015, according to the company. (The further coverage goes back, the more valuable the data set.) In May, it became the first alternative-data company to go public, seeking to expand its client focus beyond the hedge funds that first took notice.
SOCIAL SENTIMENT AND PRODUCT REVIEWS
Just as marketers use social listening tools to monitor brand perception online, investment firms consider social media data when evaluating stocks. Thinknum’s media outlet, the Business of Business, noted earlier this year that, before Peloton shares tumbled nearly 15 percent in the wake of a treadmill recall, the number of online reviews that included “terrible,” “awful,” “poor,” “bad” or “broken” had gone up from three, in 2019, to 31 — a signal to sell for those who were tuned in and so inclined.
Satellite imagery proved to be an effective financial analysis tool as early as 2009. That’s when, according to The Atlantic, then-startup RS Metrics used three years’ worth of satellite data to validate Walmart founder Sam Walton’s long-held belief that the number of cars in stores’ parking lots correlated to overall revenue. E-commerce complicated that a bit, of course, but imagery providers continue to find uses that financial firms consider lucrative, including monitoring deforestation or natural disasters that may impact supply chains. Expect the trend to continue, as companies like SpaceX and OneWeb have prompted a massive surge in satellite launches.
Hopefully by reading this far, you can understand what alternative data exactly is and why it is an extreme weapon for traders to possess. While some alternative data may not be available to your typical retail trader, it is important to know what data is available at your disposal. Another great simple resource for an average retail trader is QuiverQuant which is a site that scrapes alternative stock data from across the internet and aggregates it into a free, easy to use web dashboard.
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