Vice Chairman | Investment Management Practice
Research Leader | Investment Management
Collective intelligence investing creates new rewards and risks
Alternative data from sources like social media, news feeds, and payments information could bring end-to-end benefits to investment management (IM). But do the benefits outweigh the risks? This article outlines key considerations for IM firms.
Alternative data have become valuable tools for IM firms seeking alpha. Collective intelligence investing (CII)—deriving market insights from online communities and crowdsourcing platforms—continues to increase in popularity, creating new growth opportunities as well as new risks.
Hedge funds were the innovators in this space, but they are being joined by private equity (PE) and long-only managers today. Alternative data’s adoption is reaching a tipping point and their use is growing exponentially.
Estimating the risk-and-reward equation for alternative data may be more of a challenge than for established data sources, but there are steps IM firms can do to minimize operational risks and capitalize on its benefits.
Information advantage can be hard to come by in current markets. Any edge, even a narrow timing advantage, may yield a more effective trading signal, algorithm, or investment model. Enter alternative data, which are valuable tools for investment management firms seeking that edge. A subset of big data, often nonfinancial and unstructured (text and imagery), alternative data are drawn from a variety of sources: News feeds, social media, online communities, communications metadata, satellite imagery, geo-spatial information, and others (see figure 1). By using Web 2.0 technologies and advanced analytics, investment managers can derive market insights from these sources.