As more asset managers incorporate alternative data sources into their investment strategies, they face an explosive growth in providers.
The industry analysis firm Tabb Group predicts that the estimated $200 million alternative data market will double within five years, according to Valerie Bogard, an analyst at Tabb.
“The drivers of this growth are both the expansion of users into smaller quant funds, fundamental funds, the sell side, and venture capitalists, which could increase the user base to several hundred, as well as the expansion of data providers,” she wrote. “As companies increasingly become data-savvy and seek to monetize their exhaust data, this base is also growing immensely.”
This growth has many hedge funds worried, added Rado Lipuš, founder and CEO of Neudata.
“Speaking with a hedge fund, they really were worried about the volume and the number of providers popping up everywhere,” he said. “They’re struggling to cope with the information flow and organizing it. And they think that the number of providers is going to be a much larger number than it is today.”
Lipuš remains cautious regarding the capabilities and quality the growing number of alternative data providers.
“A lot of groups out there realize that they have interesting data that the financial world can use,” he said. “But after making one or two sales, they realize that it is a long, tough process and that they don’t speak the same language. They often look for partners.”
Nonetheless, it has not stopped hedge fund equities analysts and quant strategists from being the earliest adopters of the new data sets, according to Lipuš.
“We have already seen fund launches, complete startups of emerging managers on one side, pitching and proposing new and different sources,” he said. “We’ve seen funds backed by family offices to do exactly that. Then we’ve seen fund launches in large, well-known players.”
However, Lipuš sees this trend is changing as typical asset managers overcome their complacency and incorporate big data into their strategies.
“It doesn’t have to be a jump into something new,” he said. “Sometimes it could just be improving existing models and factors. I’ve heard that from a few times from successful founders of fund management houses.”
From a geographic perspective, Lipuš sees the North American markets ahead of other regions in their awareness and used of alternative data.
“In Europe and Asia, things are not quite there yet regarding awareness and general preparedness is much lower,” he said. “There are a few years of those differences. We see this when we speak to potential clients in different regions: The conversations are completely different.”
