A multibillion-dollar industry offering unusual data such as satellite imagery and measurements of social media sentiment is enjoying a boom in demand as hedge funds and companies hunt for clues on how to tackle the coronavirus crisis.
Many investors have turned to so-called alternative data — niche information beyond standard financial market indicators or statistical releases — after finding official numbers too slow in reflecting the collapse in economic activity due to Covid, and the recovery. Providers argue it can provide precious, real-time glimpses into how a company or economy is faring.
“Absolutely, without a doubt, over the last six months the demand has skyrocketed,” said Hinesh Kalian, director of data science at hedge fund firm Man Group, which shepherds $104bn in assets. “There has been an increase in alternative data providers approaching us, and an increase in our investment team’s interest in these data sets.”
Michael Spellacy, global head of capital markets at consultancy Accenture, said hedge funds had profited this year from methods such as comparing social media posts in China with Chinese government statements to gauge the extent of the virus’s impact, as well as collecting data on the movement of Chinese container ships to monitor activity. “In this particular crisis, it’s become extremely valuable,” he said.
Alternative data is not a new concept. Merchants in ancient Babylon measured the depth and flow of the Euphrates river to try to get an edge in their trading, after discovering a correlation with the supply of commodities, according to Andrew Lo and Jasmina Hasanhodzic’s The Evolution of Technical Analysis.
However, the sector came to widespread attention several years ago during an investor craze for computer-driven trading funds.
Even before coronavirus struck, total annual spending on such information by fund managers alone was predicted to reach more than $1.7bn this year, up from $400m three years ago, according to Alternativedata.org. There are nearly 1,500 providers of alternative data, according to Neudata, another seller of such information, which says it has been around four times busier than normal handling client queries in March, April and May.
BNP Paribas Asset Management now spends about 10 per cent of its market data budget on alternative sources, up from an “insignificant” amount five years ago, according to chief executive Frédéric Janbon. The €400bn-in-assets firm said tracking Covid-19 infection indicators, such as the reproduction or R number — which measures how quickly the virus is spreading — and real-time energy consumption proved useful this year.
Sometimes, the sources are traditional but the method of analysing them is new. In June, Swiss investment firm Unigestion began using sentiment signals from a “newscaster” that reads media articles from providers such as the Financial Times and analyst notes in its funds, after finding it improved the performance of its model portfolios during the coronavirus crisis. “It permitted us to get out of equities sooner and permitted us getting [back] into equities sooner,” said chief executive Fiona Frick.
Asif Noor, fund manager at hedge fund Aspect Capital, has been a believer in alternative data for several years but says the experience of recent months has “solidified that view”.
Its news-reading algorithms spotted weakening sentiment on the Norwegian krone, which moves with oil prices, in mid-February. By the end of the month its Systematic Global Macro fund had gone short the currency against the dollar, and it built this position into early March. It then profited as the oil price dropped and the krone slumped, pushing the dollar up from NKr9.2 krone per dollar on March 6 to above NKr12 on March 19.
However, some managers question how often alternative data can lead to winning bets, even if it does highlight an economic trend.
“More data that is more volatile and shorter-term may not always prove helpful to generate profitable trades,” said Michiel Meeuwissen, co-head of alternative strategies at Kempen Capital Management in Amsterdam. “Common sense can at times be as strong or stronger,” he added, giving the example of picking sectors to bet against in light of the Covid crisis.
There are plenty of blind alleys, investors say. Social media posts about the virus outbreak in Wuhan may appear useful but are often not geocoded — meaning they lack location data — which makes it hard to determine whether the posts come from people who are really there. Jeremy Brunelli of UBS’s Evidence Lab began to investigate using CCTV data in the City of London to monitor the impact of virus restrictions, but found he could not process the data quickly enough before events moved on.
Anthony Lawler, head of GAM Systematic, said his firm used alternative data but added that such information had not been behind his funds’ gains last year, nor had it driven markets this year.
“Daily credit card data or footfall data didn’t lead the recovery in [stock] prices. What led the recovery was investor sentiment, animal spirits and a belief in a better future,” he said. “For none of that could you use innovative photographic, credit card or shipping data.
“We remain of the view that alternative data is creating value for the data providers, but not yet the investors.”