Alternative Data: Too Expensive?

 

Whenever we speak with fund managers who do not use Alternative Data, we ask them about their rationale for opting out of this potential source of Alpha.

 

The most common response we hear is that the data is too expensive. By expensive, investors don’t just mean the sticker price on a dataset, they also worry about the hidden costs of sourcing, evaluating, and integrating data. Naturally, the equation has two sides – cost and return – and both must be assessed separately.

 

At Maiden Century, we encourage investors to take the leap into Alternative Data for several reasons. Our principal view is that Alternative Data delivers a high ROI for funds that have the right setup to consistently extract value from their data assets.

 

On the cost side, while data sourcing and management has been traditionally expensive, we have been able to use technology to make Alternative Data more accessible to the institutional investing community. Our combination of infrastructure & tooling saves investors the considerable time and resources they would need to build the data team and tech in-house.

 

Getting Value from Free Alternative Data

 

We should start by clarifying that alternative data comes in many flavors, spanning various price points. Many are in fact free. These include various data feeds investors can tap into with minimal scraping skills, such as Google Trends, macroeconomic data from sources like FRED, and industry-specific data such as restaurant trends via OpenTable.

Maiden Century has a growing list of FREE datasets and recently added a cryptocurrency dataset from CoinGecko.

 

Let’s take the Transportation Security Administration’s checkpoint traffic information, made publicly available daily here. An investor may hypothesize that airline passenger travel is a strong indicator of airline capacity utilization, a key ingredient in understanding KPIs such as cost per available seat mile and passenger revenues. This is indeed the case. Utilizing the Maiden Century IDEA platform while focusing solely on the TSA data set, a user can quickly see that the TSA feed generates MAPEs as low as 1.3% (and in the most recent quarter, 2.2%) in its prediction of Delta Airline’s (DAL US) reported quarterly passenger revenue. This is quite low especially considering that revenue recognition issues make it challenging to predict Airline KPIs with consumer transaction data.

 

 

 

While TSA’s TRFC dataset is a powerful indicator for travel and hospitality companies, it doesn’t generate the same degree of accuracy, across a broad swath of companies, as other datasets such as credit card spend. While many alternative datasets do come with 5 and sometimes 6 figure annual price tags, the reality is they can deliver significant return on investment for the right firm. Additionally, combining these datasets together generates superior results compared to any single dataset in isolation. We see this through Maiden Century’s IDEA prediction for Delta’s reported passenger revenue (see image above), that supersedes both the TSA dataset’s prediction, Google Trends (another free dataset), as well as some of our participating credit card vendor’s.

 

Increasing ROI from premium Alternative Data

 

Taking a step back, when incorporated into an investor’s existing underwriting process, alternative data sets improve the quality of forecast, increasing the opportunity for alpha generation. This improves the business viability of the investment management firm, with an improved ability to retain and raise incremental capital. It can also reduce portfolio tail-risk by avoiding a blindsiding on earnings & guidance. This reduces hedging costs while simultaneously improving the risk/return potential of the portfolio.

 

Of course, indiscriminate and ill-prepared spending is not a recipe for high ROI. Wading into the field has traditionally been challenging given a certain degree of opacity across vendors. This leads to difficulty for a fundamentally focused manager to tangibly understand data quality without making a significant investment of time, energy, and resources. MaidenCentury drastically reduces this challenge and expense by freeing the manager from costly search and implementation analysis while simultaneously accelerating time to ROI.

 

MaidenCentury partners with over 55 data providers, delivering 135+ datasets. Our front-end tools like Spotlight allow users to quickly interrogate which datasets provide the most accurate predictions for the positions they care about. Our IDEA platform seamlessly integrates multiple data sources – including those free feeds! – to allow users to gain higher conviction predictions regarding KPI, earnings, and guidance moves. Our “single source of truth” approach allows them to optimize their spend across different data sources, balancing strengths and weaknesses. In short, we take the pain and expense out of searching, analyzing, and onboarding alternative data, drastically reducing the time to ROI from months to minutes.

 

Find out more in a live demo: contact us.