As institutions expand their budgets for alternative data sources, the value of those data — and investors’ ability to create alpha using them — decreases.
A new report from Greenwich Associates titled “A Buyers Guide to Alternative Data” shows that asset managers are increasing their budgets for alternative data and forecasts that more will be using data sets to inform their investment decisions.
Here’s the rub, though: as more investment shops buy alternative data from the same sources, their edge declines, rendering the spending less valuable.
Greenwich surveyed forty senior employees at institutional asset managers, hedge funds, and proprietary trading firms between March and May to create the report, released Tuesday.
The average investment firm spent about $900,000 yearly on alternative data, and budgets tracked institution’s assets under management. Web-scraped data is the most popular among investors, with 48 percent of institutions surveyed using it to enhance investment programs.
“Extrapolating this data across the whole market, we estimate that annual industry budgets for alternative data now stand at $300 million — almost double from one year ago,” the Greenwich report stated.
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Interestingly, some investors are using alternative data sources started exploring alternative data sets because their peers were doing it. “Our firm decided to explore utilizing alternative data sets because others are — and we were feeling left behind,” a hedge fund’s director of research told Greenwich.
It may come as no surprise, then, that a “large majority of buyers” were unable to quantify the return on investment of the data sets, according to the report.
This is because investors combine the alternative data with other data sets or already existing investment practices that have been working, making it difficult to know what exactly boosted returns.
“One of the things where people try to fall down is that data could provide correlation but not be causational,” said Ian Picache, managing partner at Two Six Capital, a data science firm that private equity firms hire to value acquisition targets.
This isn’t the only struggle investors using alternative data sets will likely have. As they become more popular, and bigger institutions starting using popular sets, their value degrades.
“This will enable alternative data to reach a wider mass audience of investors who are seeking insights from alternative data to confirm or challenge an existing thesis,” according to Greenwich. “However, integration will need to be done in a way that ensures the data remains ‘alternative,’ or risk ceding ground to the upstart alternative data providers.”
“In the public markets, the value of data is short-lived,” he told Institutional Investor by phone. “Everyone will buy it, at the end of the day, will make trades on it, and everyone will find some level of correlation. That alpha is going to get arbitraged away in the number of months.”