While still to be determined, industry observers have found that sophisticated investors are increasingly using alternative data and other obscure information they can glean to “job” the markets.
Hedge funds do it, quant funds do it, and now it looks as though mutual funds are doing it.
"There is a whole class of emerging data, and that comes from the deployment of millions of sensors around the world by governments, companies or consumers," said Adam Broun, chief operating officer at Kensho
, a startup in the field that's backed by Goldman Sachs.
"There is better weather data, and you can get much more detail on microclimates. There is traffic data, … and every smart phone is a data collection tool. The list goes on.”
Hedge funds have been using alternative data for some time now in an effort to deliver outsized returns for their clients. The thinking is mutual fund providers will jump onboard, applying key data to lessons learned from quant funds. The end result could be the next generation of actively managed mutual funds where alternative data dictates stock selection.
JC Penney is a recent example of how alternative data’s being used by those hedge funds. When the retailer came out with its Q1 earnings in mid-May, a select group of investors knew ahead of time that the company’s numbers would be better than expected.
The investors hired RS Metrics, a Chicago-based firm that provides investor, corporate and government clients with proprietary data based on quantitative analysis of high-resolution satellite imagery, demographic data and open-source research.
In the case of JC Penney it had satellite imagery of the parking lots at all of the company’s locations across the United States. Those images were able to provide investors with real-time data showing increased traffic in their parking lots in March and April and if the news was acted upon prior to JC Penney’s earnings announcement they stood to profit from those trades.
Still early in the game, mutual fund companies are taking an interest in alternative data.
Vanguard Group uses the data to figure out which way the markets are blowing. Whether it be social media, government filings or even text analysis, its quantitative equities division looks for
"We really want to see, well, what’s the causality chain?" John Ameriks, the firm's head of quantitative equity told Business Insider recently. "When we see something occurring in the marketplace in conjunction with this type of news, with this type of information, or this type of search activity, why do we think that’s leading to a signal ... and what’s the theory behind why it’s going to persist?”
Quant funds already exist. Can “alternative data” mutual funds be far behind?