Alternative data usage is growing among hedge funds, with just over half of managers saying that they currently use the tool as a way to gain a competitive edge.

This finding is from a report by the Alternative Investment Management Association (AIMA) in collaboration with fund service group SS&C, which surveyed 100 hedge funds who manage a combined USD 720bn in assets. The group found 53% of respondents had adopted alternative data to inform their investment practices or business operations.

Among heavy data users, the top datasets are web-crawled data, data sourced from expert networks, consumer spending data, business performance metrics and online reviews/social media sentiment. According to data from Neudata Scout, web-scraped data is the largest category of alternative data, with 27% of datasets involving a web-scraped component.

The report highlighted the diversity in types of data used by hedge funds — according to its sample, long/short equity funds prefer sentiment data, online reviews and payments data, while quantitative funds prefer weather patterns, satellite imagery, logistics and data scraped from the web. CTAs included in the study expressed interest in logistics and consumer spending data.

Alternative data’s use cases also vary — many of the respondents touted its usefulness as a research tool, both to source new investment opportunities and to improve investment decisions. Seven out of 10 managers who have been using alternative data for more than five years said they also use alt data to help generate outperformance, compared to 44% of those who have been using alt data for fewer than five years.

Users of alternative data highlighted several challenges in using alternative data, namely the lack of appropriate infrastructure to work with unstructured data sources. Market leaders were more likely than later adopters to mention issues around back-testing historical data, while over half of respondents in both groups mentioned the difficulty associated with sourcing quality datasets.

Cost, however, wasn’t a significant barrier to entry. In total, the group of users — which managed about USD 382bn — spent around USD 250m on alternative data, roughly 4.4% of the revenues they would generate under an annual management fee of 1.5%. In fact, over 50% of alternative datasets can be purchased for under USD 50k per year, according to information from Neudata Scout.

Most market leaders are spending between 5% and 20% of their expenses, excluding salaries, on working with alternative data. At the same time, 83% of those who had worked with alternative data for fewer than five years plan to increase their spending on alternative data over the next three years.

Photo by Henrik Dønnestad on Unsplash