Access Alternative Data = Better Investment Strategies, But Not Without Concerns.

Lowenstein Sandler announced today the release of Alternative Data = Better Investment Strategies, But Not Without Concerns, its hedge fund industry survey and one of the only reports addressing the topic. The survey, which found that over 80 percent of hedge funds are using alternative data in some capacity, is the first survey of its kind from the firm’s Investment Management Group.

The report was authored by Peter D. Greene, partner and Vice Chair of Lowenstein’s Investment Management Group, with contributions from Benjamin Kozinn, a partner in that group.

“It is not surprising to me that an overwhelming majority of funds are using alternative data,” said Greene. “What is interesting is how funds of various sizes are using it and how they plan to expand their use in the future. In a changing industry, it is more important than ever to learn what alternative data can do, while also acknowledging the limitations and concerns that come with using such data.”

Completed by C-level executives, data scientists, equity analysts, portfolio managers, and legal/compliance officers in the private funds industry, the survey assessed funds’ use of alternative data. Funds were grouped by size–less than $500 million, $500 million to $5 billion, and greater than $5 billion–to determine how data use, and concerns about it, differ at varying levels of asset value. 

According to the survey results, 82 percent of hedge funds are already using alternative data in some capacity, and 75 percent of respondents are using it to make better investment predictions. With more funds using alternative data, the results evidence an increasing interest in using newer data sources such as web scraping and biometrics to stay competitive. But, factors such as new regulations and privacy laws, cost and time investment, and the ability to distinguish relevant information from large volumes of data could stymie those plans for growth. 

Key findings from the report include:

  • Ninety-eight percent of respondents who use alternative data utilize it in combination with fundamental analysis to make investment decisions.
  • Respondents selected consumer transaction data, followed by data gathered through social media and cloud platforms, as the most popular alternative data sources for the next six to 12 months–but only social media is expected to grow in popularity.
  • Fifty-seven percent of respondents expect to use web scraping as a data source within a year, a jump from the current 49 percent using it. Similarly, 32 percent use biometric data now, and 45 percent expect to use it in the future.
  • Eighty-one percent of respondents’ organizations plan to increase their budgets for alternative data. Of those, the majority plan to increase budgets by 11-25 percent.

Access Alternative Data = Better Investment Strategies, But Not Without Concerns.