It wasn't all that long ago that a fund which found an original source of data could run with it to generate alpha for a while. Not anymore. The new complaint among data science professionals in the hedge fund industry is that the alpha-generating lifetime of data sources is diminishing. - Funds that want to maintain their edge need to be forever looking for new sources of data. And the new data needs to be different. In industry parlance, it needs to be "alternative."
Alternative data is simply defined as non-traditional data sources. It's, "any sort of dataset, which is not traditionally used within financial markets," according to Saeed Amen, a former Lehman Brothers trader who's been writing about alternative data for years. It might be data based on newswires like Bloomberg, it might be satellite imagery showing the number of cars in a retailer's car park, it might be data reflecting historic credit card spending, it might be data on weather.
As the appetite for alternative data grows, research by Thinknum - itself an alternative data provider - shows that jobs in the space are increasing exponentially. The chart below, showing jobs mentioning alternative data advertised by 40 top financial services firms, including leading banks and hedge funds over the past three years, suggests that late 2021 was the inflection point.
Marta Lopata, chief growth officer at Thinknum, says their own data suggests that alt-data jobs are up 460% in a six-month period. Not all the jobs mentioning "alt-data" are alt-data specific, however: they include everything from data science and data engineer jobs, to jobs for quant researchers and ESG data specialists.
As alternative data jobs go through the roof, Lopata says traditional finance qualifications like the CFA Charter are failing to keep pace. The CFA requires a huge time commitment, but has a very minimal data-focus, says Lopata. Working with Amen, Thinknum has created a new Alternative Data Academy based on e-learning to help fill the gap.
Part of the problem is that working with alternative data isn't the same as working with traditional data - it tends to be very unstructured and to require heavy 'cleaning' before use. Data cleaning is not the most sexy job in data science, but it's imperative in the alt data market, and it needs to be done fast. Companies like Crux Informatics, which specialize in 'data ingestion and onboarding', are data cleaning specialists. Crux works with banks like Citi and Goldman Sachs and hedge funds like Two Sigma.
Crux would enable Two Sigma to "broaden the spectrum of datasets" it uses, said Two Sigma chief data scientist, Ali-Milan Nekmouche, in 2018 when the two companies began working together.
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