CAIA: what makes alt-data different?

What makes alt-data different is that it is mostly a story about the size and structure of data sets that separately, or together, can potentially provide an information edge to virtually any industry, including those practicing the craft of asset management. One could naturally conclude that this edge can be monetized into untapped alpha but a recent paper in The Journal of Financial Data Science entitled Rethinking Alternative Data in Institutional Investment did a very good job of debunking this opportunistic use-case to one mostly seen amongst the day-trader crowd. The use of alt-data by the market participant on the couch versus the more patient investor who thinks about the concepts of risk management and organizational alpha is as different as the Montagues and the Capulets.

Public markets have become highly efficient. At every moment, a geopolitical flare, an earnings surprise, or a tweet, can cause bouts of volatility. In the short-term the markets become a less efficient voting machine and the opportunistic trader looks to pounce and profit from these gyrations. It is becoming increasingly difficult to exploit these opportunities as the correlations of the trading algorithms move closer to 1, and the investment process and philosophy of being able to find good ideas faster than the competition, is neither sustainable nor of institutional quality.

The paper goes on to talk about the anticipatory benefits of this data and how it can help build a better thesis around the direction of inflation, a company’s true conviction and exposure to ESG risks, or the ability to monitor an emerging market project and the inherent agency problems of local management, using orbital imagery. These types of risk-based approaches should yield better outcomes for the patient investor and provide for more context around the fuzzy border of the fat-tail that can erode years of wealth creation in a single swoon. The concept of organizational alpha is equally well developed around the simple approach of eliminating internal inefficiencies; easier said than done, but the successful investors have long understood that less cost equals more alpha.

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