Every day, we generate a lot of data obliviously. For instance, going to a retail store and getting a pair of pants generates a massive amount of usable data, including the location you’re shopping at, price ranges, and your choices of products at the store.
That’s not all. Did you know that some investors make money off the data you give them for free? Well, now you do. That data is refined, anonymized, and combined with other similar shoppers’ data, then sold. The end result is usually hedge funds.
More and more hedge fund managers now use alternative data to edge out their competitors. They use it to understand market trends better, although gaining access to this data is not easy. To make their data collection even easier, they take advantage of a public data scraper, but even so, making sense of that data still remains a challenge. In this article, we’ll look at how hedge funds make use of these alternative datasets.
Types of Alternative Data
Creating alpha proficiently is hard to achieve without the right data. However, alternative data sets offer new opportunities for hedge funds. Some of the most common types of alternative data are:
1. Spending and lifestyle data
Consumer spending and lifestyle data are some of the most effective and commonly used information sources that hedge funds can utilize. This data is usually extracted from sites online and used to understand how much shoppers spend and analyze crucial market trends, especially in retail. Lifestyle data includes what consumers buy the most and where they buy it. Some common examples of lifestyle and spending data are credit card receipts and retail footfall in the markets.
2. Climate Data
Changes in the environment and weather now play a crucial role in how the world revolves and market trends evolve. This means that climate data is becoming more and more pertinent for hedge funds’ investment portfolios.
A practical example is the use of satellite imagery to forecast the amount of rainfall a zone will receive, as this directly impacts the prices of the agricultural produce in that geographical area. Moreover, hedge fund managers can use raw data or the same satellite data to predict patterns in tourism, travel, and how much consumers spend.
3. Web-crawled Data
The internet has widely transformed the global economy, as trends are available online for hedge fund managers to reflect on their consumer spending habits and how they interact with various brands. This alternative data shows how consumer engagement differentiates a company from its competitors and provides insights as to whether it is on the same level they are.
All this information on the web can be extracted from the web pages and refined to help hedge funds gain a competitive edge.
How do Hedge Funds Use Alternative Data?
1. Price Monitoring
Hedge funds use alternative data to monitor companies’ product pricing and inventory levels. This helps them to easily monitor the demand, supply, market, and consumption rates of a group of companies offering the same range of products. This in turn makes it easier to generate more alpha, which is one of the risk management indicators for stocks and bonds.
2. News Data
Gone are the days when companies would venture into trends without the proper information. Investment companies now make their decisions based on the news they get from the manufacturing and service companies that have been more active in the market. This is where public data scrapers come in. They extract news headlines and other related data from the internet, analyze them, and gain valuable insights that enable them to make informed choices that affect their investment choices.
3. Market Data Integration
Information about the market and market trends is available on the internet, and that too, for free. However, all that data would be worthless if you couldn’t find the exact relevant datasets that you’re looking for. However, alternative data takes that worry away, as hedge funds receive a steady stream of corporate information and remove any redundant data from the information that comes from the millions of active websites. This is one of the most crucial use cases of alternative data in the investment process.
4. Competitor Analysis
Competitive analysis is arguably the most used strategy in every industry, more so in stock research and investment. It’s easier to compete when you know what you’re up against. To gain an edge over your competitors, you have to analyze their trends and strategies and find ways of bettering them.
This also helps hedge funds to determine the level of competition they are likely to face in certain areas of the business. Usually, the more competitive a field is, the higher the market, and the more profitable it is.
5. Enhancing Performance
Alternative data provides a larger volume of information than you’d find anywhere else. This includes access to data that is not easily accessible and collecting information from sources that would have otherwise been bypassed and contain data that could grow organizations. The outperformance can only be achieved with alternative data from unlikely sources that most competitors have yet to tap into. This calls for creativity and accuracy in sourcing the data sets online, but the end results are definitely worth the effort.
Thanks to alternative data, hedge fund managers can gain access to information that their competitors don’t have, boosting their investors’ alpha considerably. It provides a platform for hedge fund managers to make informed decisions before venturing into investments.