Data Analytics: The New Frontier for Generating Alpha

Quantamental is the new buzzword for Hedge Funds and Asset Managers as they explore innovative ways to integrate data analytics to complement fundamental analysis and help generate Alpha. As services such as Two Sigma’s Data Clinic have clearly demonstrated, data is one of the most valuable modern assets available. More specifically, alternative consumer and company data in today’s connected world can provide more comprehensive insight and outlooks for investors across various sectors. And hedge funds are realizing the value of investing in data analytic strategies now that will work for them to increase returns, maximize profits and streamline efficient systems later.

The growing field of data analytics pairs the massive amounts of public and consumer data available with numerical optimization to provide hedge fund managers with more tools for investment analysis. According to quant investment enthusiasts, relying on data analytics is not about replacing the human element of intuition in investment and fund management, but instead about freeing up time, energy and mental capacity, as well as using technology to identify investment opportunities that human processing simply can’t detect. Simply put, thanks to data analytics, quant investing has gone mainstream.

Why Data Matters

Facebook likes, retweets and double-taps on Instagram may not seem like the secret to maximizing a hedge fund portfolio, but behind every share, comment, and like, is a real person sharing their view about something. Taken together, even something as seemingly simple as social media data can provide a wealth of information ranging from a CEO tweeting about her company’s next move to macro and political factors that could affect investments. In using alternative data analysis, investors may be able to avoid risks that are not yet identified through traditional sources, or uncover new insights that others haven’t acted on. Data analytics and technology can help fuel customer growth, manage risk appetite, monitor regulatory compliance and combine artificial intelligence (AI) with operational efficiencies.

According to an April 2017 McKinsey Global Institute report on Analytics and Banking, the world of data is exploding: their research revealed that by 2020, there will be approximately 1.7 megabytes per second of new information created for every single human being on the planet. Additionally, the Banking Tech’s Report on Deriving Value from Big Data estimates that by the same timeline, the accumulated digital universe will reach a staggering 44 trillion gigabytes—a third of which will pass through the cloud. They believe that financial organizations that are primed and ready to utilize the new influx of data can expect to increase their operating margins by even up to 60%.

The explosion of alternative data further necessitates the importance of professional firms dedicated to tailoring data mining and interpretation specific to defined investment strategies. It’s no longer about who has the data, but who can best utilize it. And with the world of data growing by the minute, the key to harnessing the power of data analytics lies in combining the best of both worlds: the efficiency and precision of data-based technology with the expertise and real-time insight of those who can help put the knowledge the data provides to work for their clients.

The Data

What exactly comprises the data sets used in investor strategy based on data analysis? Decision-driving data can include everything from cloud-based workforce data to geolocation data, social media data to transaction history data, all of which can be used to help gain valuable insight into trends, provide real-time perspective, and generate actionable insight.

Unlike TresVista, there aren’t many firms today that provide high-end data analytics services specifically aimed at hedge funds and asset managers across the value chain. Such providers typically target corporate clients who can offer a steady stream of business, as opposed to investors whose analytical needs tend to be more wide-ranging and often non-recurring. Increasingly, Institutional Investors, Hedge Funds and Asset Managers have turned to employing a dedicated team of data scientists to build out their data analytic strategy – or even investing in such boutiques themselves. Partnering with TresVista for data analytics can augment these efforts in terms of providing operating leverage for such teams to be more effective and efficient; or even offer a compelling alternative acquiring such capabilities in-house.

How It’s Used

Data analytics is now being used across all asset classes including public equities, debt, fixed income and structured credit strategies, and can be employed across a wide range of investment opportunities. And while the specifics of data harnessing may be best left to the scientists, all players at the investment level can benefit from learning how the information can be used. Data analytics for hedge funds can be applied in venues such as:

With so much public data available, the analysis step is key to utilization, and leading companies such as 7Park Data, Thinknum, Novus or Archway Technology Partners stand apart by offering innovative ways to filter, tag, synthesize, and apply raw data. The data edge allows for managers to be updated with real-time data, track competitor growth and numbers and customize related databases to create financial forecasts. Investment managers can benefit from data analytics to help them readily answer key questions for their investors such as alpha generation opportunities, ROIC sectors, liquidity risk, trade value and more.

Most of all, analytics tools can help hedge fund managers manage risk and execute portfolio optimization strategies that are rooted in scientific method. Overall, the consensus is clear: investment managers can’t afford to not invest in data analytics and strategy for the future.