This post was co-written with Richard Harmon Ph.D., Director, EMEA Financial Services at Cloudera.
A growing number of asset management firms have been integrating alternative data sources with conventional market data, enriching trading strategies with additional insights as a means to gain an informational advantage and an edge on the rest of the market. But the informational advantage that can be gained through the use of alternative data will diminish as those sources become generally understood and adopted. To avert this alpha decay, it is critical to understand how alternative data will contribute to your strategy and make certain that it is applied for the right reasons.
Active management is fundamentally about uncovering opportunities before they are priced in by the broader market. Over the past 5 years a growing number of asset management firms have been integrating alternative data sources with conventional market data, enriching trading strategies with additional insights as a means to gain an informational advantage and make more informed investment decisions in order to get an edge on the rest of the market.
The informational advantage that can be gained through the use of alternative data will diminish as those sources become generally understood and adopted. In other words, the alpha decays at an accelerated rate as more firms process and analyze similar alternative data sources. But if your competitor’s implementation is poor, no ground is lost.
To avert alpha decay, it is critical to understand how alternative data will contribute to your strategy and make certain that it is applied for the right reasons (fit for purpose). It is also critical to ensure the integrity of the underlying data and to optimize the models that use it, thus accelerating an informed decision-making process.
This post was first published on TabbForum.