In the middle of the summer vacation on Friday 10 August, Turkey’s lira plunged by one-fifth, leading to fears that the country’s crisis would spread to other markets. The US had suddenly imposed tariffs on Turkish steel in protest against the imprisonment of an American pastor, which added to investors’ existing concerns about President Tayyip Erdoğan taking increasing control over the Turkish economy. The steep jump in volatility highlighted the value of investors receiving early insights on news that can impact markets, intelligence that is increasingly being delivered first through alternative data sources.
“With alternative data sets, firms can dig into the insights behind data sets that are typically updated much more frequently and are more differentiated than the data and information everybody already has,” said Gabriel Wang, an analyst for consultancy Aite Group, in the report Alternative Data in Active Asset Management: A New Source of Alpha?
For instance, buy-side and sell-side professionals use Dataminr, an algorithmic-based alternative data provider that analyses Twitter and other public information sources to discover high-impact events, to learn about critical market-moving events as early as possible.
Ed Oliver, director, finance sales at Dataminr, told Markets Media that the firm has delivered more breaking news alerts related to Turkey following the presidential election in June, the appointment of President Erdogan’s son-in-law as Finance Minister and the threats of US sanctions.
"Turkey continues to be an area of real interest. Right now, the financial world's eyes are pinned toward Turkey as the country battles a financial crisis and tense political relationships," Oliver added.
As a result, Dataminr has utilized its arsenal of local Turkish sources to detect significant news, sometimes using tweets in Turkish, in addition to English and other languages. The value of having local news sources was highlighted on 14 August when Dataminr for Finance sent an alert to clients at 7:54pm about Turkey increasing retaliatory tariffs on certain US goods. The alert was based on an original Tweet from a Turkish news agency, @AACanli, and delivered to clients nearly an hour and a half before the story hit the major news wires, which then led to a further fall in the lira before Turkish officials pledged to defend the currency and there was a rally.
Receiving early news is important as investors have been looking for protection via hedging tools across asset classes. Sam Pierson, an analyst at data provider IHS Markit, said in a report on 14 August that investors had been using credit default swap contracts on Turkish sovereign debt as well as short positions in equities to gain short exposure to the country. The credit default swap increased by more than 100 basis points from 457 basis points on Friday 10 August to 575 basis points on Monday 13 August. At the same time the iShares MSCI Turkey ETF reached its lowest level since March 2009.
“The borrowing in dollar terms, by corporates as well as the government, have put pressure on the currency, which has traded down nearly 50% relative to the dollar in 2018,” Pierson added. “The recent freefall sell-off in the Turkish lira has made it the worst performing currency relative to the dollar year-to-date, though it has managed to outperform Bitcoin in 2018, so far.”
Ewout van Schaick, head of multi asset at NN Investment Partners said in a report in August that Turkey’s economic problems and escalating tensions with the United States caused a spike in risk aversion among investors globally and knocked confidence in emerging market assets. Due to this turmoil, the Dutch asset manager reduced its equity exposure to neutral.
van Schaick said in the report: “Turkey’s balance-of-payments and credibility problems are not widespread in the rest of the emerging world. Argentina is the only country that also has large external imbalances, but here the government has a good reputation and has stepped up its macro adjustment efforts with the backing of the IMF.”
However the NN IP team still believes fundamentals for emerging markets continue to be robust while repricing will allow for more appealing valuations to emerge.
“Emerging market debt remains an attractive investment in the medium term,” he added. “Tail risks have increased, however, and we are cautious in the short term given the escalation of risks in key emerging market economies.”
Alternative data can identify these tail risks more quickly
Oliver said: “We are looking to add more public information sources outside Twitter, such as blogs, which can be as valuable as structured data. The additional insight will enable investors to make better decisions and manage their risk profile.”
In the Aite survey just over one third of respondents, 36%, strongly agreed that the frequent inflow of alternative data allows for better portfolio monitoring and enhances portfolio management, and 65% plan to increase spending on alternative data within the next 24 months. More than half, 55%, of asset managers currently spend less than $1m per year on alternative data.
“In general, alternative data sources are updated more frequently, which helps portfolio managers and the investment team better align portfolio holdings with changing market conditions,” said Wang.
The majority of fund managers are going to increase their spending on alternative data over the next two years in order to generate increased returns.
Wang said in the report that asset managers’ first priority for alternative data is to devise unique investment strategies and generate better investment returns.
“With alternative data sets, firms can dig into the insights behind data sets that are typically updated much more frequently and are more differentiated than the data and information everybody already has,” Wang added. “One asset manager described a typical use of alternative data for the firm is to use geolocation data (such as foot traffic data) obtained from third-party vendors to run a sanity check against their traditional models in predicting quarterly revenue for firms in the retail business.”
The volatility in Turkey showed the importance of using alternative data to receive market-moving information as early as possible. Over the longer-term, alternative data can also help active managers demonstrate value by helping provide increased, or uncorrelated, returns as they face increasing competition from passive managers with lower fees.