Hedge funds across the spectrum are becoming increasingly reliant on third-party tools to stand out and defeat their competition, according to a new study from law firm Lowenstein Sandler. The firm surveyed fund managers to determine how often alternative data is used as part of the investment process.
According to the report, 82% of hedge funds are using alternative data to reach performance targets.
The survey includes responses from 26 fund managers and was conducted in early 2019.
“The ubiquity of funds using alternative data to make better predictions for investments has the potential to transform the industry,” the firm said in their study. “This comes at an important moment as fund managers are seeking a competitive advantage.”
Fund managers that are using alternative data are using it to better capture trends in the market – a practice that some call “alpha through information.” 75% of respondents said they were using alternative data in this way. Another 68% said that alternative data helps to confirm existing assumptions and reinforce fundamental research.
Overall fund size also impacted how managers use data. Smaller funds – those with $500 million or less in assets under management – said that they relied on alternative data to understand competitive markets. For funds between $500 and $5 billion in AUM, alternative data is used to provide additional insights into sectors, industries or issues. For funds $5 billion or above, alternative data plays a role in developing unique investment strategies.