{"id":31225,"date":"2020-01-13T09:41:58","date_gmt":"2020-01-13T14:41:58","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=31225"},"modified":"2022-11-21T09:44:54","modified_gmt":"2022-11-21T14:44:54","slug":"why-should-we-care-about-alternative-data","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/why-should-we-care-about-alternative-data\/","title":{"rendered":"Why should we care about Alternative Data?"},"content":{"rendered":"\n

Excerpt<\/em><\/strong><\/p>\n\n\n\n

#AI  #altdata  #bigdata  #machinelearning  #quantamental<\/strong> <\/p>\n\n\n\n

These terms have received a lot of attention from the financial press, and it seems every investing conference these days has a panel discussion about how great alternative data is.  But should we care?<\/p>\n\n\n\n

Many of alt data\u2019s early adopters \u2013 and ExtractAlpha\u2019s first clients \u2013 were quant hedge funds.  This crowd learned the hard way that if they all traded on the same information, they not only were at a competitive disadvantage; they may even face an existential risk. <\/p><\/blockquote>\n\n\n\n

In early August 2007, massive drawdowns rippled through many of the factors then used by equity quants, forcing redemptions, fund closures, and a lot of soul-searching. We discussed<\/a> this Quant Quake in some detail on its ten-year anniversary and provided some takeaways from it.<\/p>\n\n\n\n

One key takeaway, which applies equally well to discretionary managers as to quants, is that sources of investing edge should be diversified, and in particular diversified away from what one\u2019s competitors are doing. We need to diversify to provide an investing edge, but also to avoid being exposed to the same factors as our competitors, since their losses could then cascade through to our losses, as happened in 2007. And of course we need to diversify to tell a better story to our own investors as to why we are different and more innovative than other investment managers.<\/p>\n\n\n\n

Diversification can be methodological (how to act on information<\/strong>) but can also be materials-based (what information to use<\/strong>).  And alternative datasets are a great way to get at new perspectives on a company\u2019s prospects.<\/p><\/blockquote>\n\n\n\n

But embracing alternative data is tricky in a few ways, which a some recent surveys have noted, and which we observe from our discussions with clients:<\/p>\n\n\n\n