Handle alternative data with care, investors tell hedge funds

Survey reveals increased due diligence concerns surrounding managers’ use of new types of information

Handle alternative data with care, investors tell hedge funds

For private equity firms and hedge funds, non-traditional data that goes beyond traditional financial information has been crucial in evaluating prospective companies to invest in. But new findings suggest that more than ever, they must be careful about how they use that information.

In a recent survey of investors and operational due diligence analysts, Corgentum consulting found that 83% anticipated continuing to increase the resources they devote to analyzing the compliance procedures surrounding alternative investment managers’ use of third-party research, including expert networks.

In particular, the survey highlighted security and privacy considerations revolving around the use of alternative data by hedge funds and private equity managers as a key focus for investors in 2020.

“Investors want fund managers to utilize alternative data to enhance their investment research process,” said Jason Scharfman, managing partner of Corgentum Consulting. “Corgentum's survey results show that investors also increasingly recognize that with the use of these new data sets comes accompanying operational, compliance and regulatory risk.”

A 78% majority of participants in the study said that they will begin incorporating a review of fund managers’ uses of alternative data. Among those that already look at alternative data, 96% said they expect to expand their due diligence in that area.

The participants stepping up their focus on alternative data use cited different key motivations, including:

  • Increased fund manager use of alternative data in alpha generation;
  • Strong regulatory push on data security and integrity, such as Europe's General Data Protection Regulation (GDPR); and
  • Increased availability and complexity of big data sets related to financial transactions, sensors, mobile devices, satellites, social media, biometric, geo-location and exhaust data

“Allocators are now beginning to tailor their due diligence processes and resources towards analyzing this growing research avenue,” Scharfman said.


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