More firms are seeing increasing value in alternative data as firms continue to grow their budgets for the non-traditional financial data significantly, according to a recent study published by industry analysis firm Greenwich Associates.
In 2018, alternative data budgets witnessed a 52% year-on-year growth, which was less than the 76% year-on-year growth that budgets saw the previous year, said Richard Johnson, principal, market structure and technology at Greenwich Associates while hosting a recent webinar on the topic.
“In no way does this indicate that growth is slowing,” he said. “What we are looking at are two high-growth numbers. Those firms that have been using alternative data for more than four years have budgets that were at least three times the size of the new people getting into this space.”
One potential explanation for the dip between the years was a price increase that alternative data suppliers slipped into the market, according to webinar-participant Stewart Stimson, head of data strategy, at Jump Trading.
“Now, it has been pushed back by a scrutiny perspective,” he said. “The data has to be valuable, or we are not going to pay for it.”
However, Stimson noted that his firm’s investment into alternative data sources does not come at the expense of standard market data products.
“We have a tolerance in our budget for the unknown,” he said. “We have some idea of how ‘known’ it is by the time we purchase it.”
In the meantime, more than half of the audience surveyed during the webinar stated that their firms were trying to understand the use alternative data better (40%) or were starting to incorporate into their workflow (18%). Slightly more than one in four of the respondents, 27%, said they had integrated one or two alternative data sources into their models. Only 16% of those polled described themselves as “power users.”
The poll results closely mirrored the value those interviewed for Greenwich’s earlier study assigned to alternative data.
Nearly three-quarters of the respondents said that alternative data enhanced their detection of trading signals. A majority, 51%, stated that alternative data provided less than 20% of the overall signal while 16% of them said that it provided between 20% and 50% of the overall signal. Only 5% of those surveyed said that alternative data provided more than 50% of the overall signal. The remaining 27% of those polled saw no or negligible contribution.
Those firms not seeing improvements from incorporating alternative data are new to the space,” said Thomas Gillian Jr., head of Americas equity sales at IHS Markit and who also participated in the webinar.
The fundamental and quantimental teams who are bleeding into the alternative data space need additional tools and technology to wring the benefits from alternative data, he added.
“We are seeing that 27% are starting to find ways to use it as an overlay, such as removing volatility from a fund,” said Gillian. “We are not replacing the team who reviews the KPIs, but we are augmenting them with some reading glasses or something that is more finely tuned so that they can tease out information the same way as the quants do.”