Alt Data Market Could Take Deep Hit Due to Coronavirus

It will take months, if not years, for the ripple effects of the coronavirus to be felt across the capital markets, but one burgeoning industry that might take a hit sooner than others is the alternative data space.

While it’s been a couple of years since alternativedata.org has updated its projections, but in 2017 the industry site said that the buy-side spent $400 million on alternative data sources and building out the necessary infrastructure to handle these sources of information. It projected by EOY 2020, that number would hit $1.7 billion. Estimates by consultancies Greenwich Associates and Opimas have shown similar spikes in buy-side spending on alternative data for this year.  

Even though the industry has been growing, buy-side firms are also finding that it’s not as easy as plug-and-play when it comes to onboarding new datasets. Last year, analytics advisory firm Element22 released a benchmark survey sponsored by UBS Asset Management. It found that of 59 asset managers, representing more than 20% of global AuM, 68% were either only in the planning phase or trialing early proofs of concept when it came to their alt data programs. While buy-side firms are interested in alternative data, many are still largely finding their footing, and that was before a massively disruptive pandemic. 

Market volatility and fears of a looming global recession could lead hedge funds to tighten their belts, and one obvious area for contraction is the onboarding of new—and costly—alternative datasets.

The chief technology officer of a multi-strat hedge fund with more than $50 billion under management tells WatersTechnology that in the next three to six months, they are “unlikely” to onboard an alternative data provider that they have not previously used. The CTO of an emerging markets hedge fund with more than $10 billion under management said they were not going to add any new alt datasets in the near term.

Meanwhile, the portfolio manager at a fund with over $25 billion under management says that they have signed on a new ESG data provider this week, and they plan to continue adding alternative sources of information in the near future, but notes that the comms front has dried up a bit.

“Since the market volatility started, we’ve not had too much conversation with data vendors, as everyone is super busy managing portfolios and communicating with clients,” they say.

And a fourth source—a CTO at a credit fund with more than $8 billion under management—says that they are actually “more likely” to onboard new datasets because of the volatility of the market, specifically around mobile app data.

It’s a mixed bag of responses, but disruption is imminent.

Cannibals

Even before the coronavirus emerged, buy-side firms were already grappling with tighter margins and higher cost pressures, while at the same time realizing the alt data they use in their investment processes is expensive and doesn’t always prove fruitful. While some buy-side firms will continue to invest in it, others will sit on the sidelines for a while, despite even the best sales tactics, which will shout “alternative data is more important than ever” during these volatile times.

Additionally, the venture capital (VC) and private equity (PE) fronts might also pull back some of their vital investment dollars in 2020. While many data providers will be able to survive a dry few months, some contraction in the space seems inevitable.

Chris Metaxas, formerly the chief revenue officer of location data provider Thasos Group—which, after significantly cutting staff last year, was sold this year to AggData’s parent company, Market Service, Inc.—thinks this is a killer market environment for a space already rife with holes. When coronavirus cases ticked up and up, and as panic started to seize New York City, he thought of all the startups headquartered there—and how at least some of them are likely to go under.

“If I was a private-equity guy, I’m not going to give another dollar to any one of these companies,” he says. “They were already skeptical, but they were believing [the] hype. But now with the demise of everything to a large extent, I don’t see anybody positioned in a way that they can say, ‘We can help the world—the market—out of this thing with our data.’”

Metaxas, though, doesn’t dispute the importance of alt data. Rather, he thinks the secretive, cards-close-to-vest hedge fund culture is preventing consumers—those same hedge funds themselves—from getting the most value out of the investments they’re making. In other words, what might best answer the “overpromise, underdeliver” accusation many have made against the vendors is another question: how can a data provider offer the right data for a trading algorithm if the fund won’t tell the provider how the algorithm works?

Much of alt data on its own doesn’t actually tell you much. It needs to be manipulated for client-specific needs, Metaxas says. Until providers are made privy to what those needs are, the best thing they can do to survive is come up with “golden nuggets” of data, though that’s easier said than done.

“That’s where there’s dollars and cents to be made for an alt data company,” Metaxas says. “And most alt data companies don’t have the wherewithal to do that because they don’t really know what the customers want because the customers on the buy side are not telling them effectively enough.”

He warns today’s newcomers to the market: “Enter it with the outlook that they’re going to be commoditized and cannibalized, and that their signal is—or should be—only a component of a larger strategy.”

Angel Hunt

In December, alt data startup Particle.One closed a $2.5 million seed round of funding. Tanya Lyubimova, the vendor’s founder and CEO, believes the current markets may be beneficial for alt data providers, noting that in volatile markets, data becomes more important.

“In fact, it’s usually the best time to enter the market, as it becomes the perfect sandbox to validate the hypothesis and test the ideas in real-time,” Lyubimova says. “Q1 of 2020 seems to be the perfect time to see if this predictive power actually adds value to strategies.”

But while this challenging market does provide an opportunity for a firm to quickly prove its worth, Lyubimova also acknowledges that it’s going to be exceedingly difficult to raise funds in the near future.

“From what I see happening in the VC space, today is probably the toughest time to raise money,” she says. “Considering that there are no in-person meetings available—both in the Valley and NYC—founders [have to] rely purely on the ability to explain their vision via a call or (hopefully) Zoom. The ‘shelter-in-place’ unfortunately brings more distraction during regular working hours as kids homeschooling is happening exactly at the same time. You hopefully book a 30 min call with an investor, but you can never tell what’s happening in the background. This means a founder should take ~2X, if not 3X, more meetings versus before the Covid-19 [outbreak].”

Lyubimova also anticipates the angel investor space—a valuable source of funds in the past for the alt data community—drying up “for the next couple of months.”

“This also creates another potential problem of not being able to close fast,” she says. “Many seed rounds were closed through micro VCs and angels—using SAFE [agreements] or convertible notes—in a matter of weeks with less [due diligence] involved, that pushed institutional VCs to react faster. Now we are in a slow-pace environment.”

Being that London, New York, and Silicon Valley/San Francisco—major fintech centers—have only been disrupted by the coronavirus for a handful of days, there’s still a ton of uncertainty permeating the market, notes Steve McLaughlin, founder and CEO of FT Partners, a San Francisco-based investment bank focused solely on the fintech community.

“On the one hand, I agree [alt data could be in trouble]. On the other hand, this type of data could be super useful right now,” he says.

But McLaughlin also echos Lyubimova’s point: If you can prove your worth in this environment, you’re likely to thrive. “There’s money for anything at a reasonable price.”