According to hedge fund chief risk officer Jack Kim, the full measure of risk in an investment portfolio cannot come from company fundamentals alone.
Getting the complete picture also requires identifying and utilizing what Kim, CRO of New York-based Data Capital Management, refers to as alternative data. Also described as nontraditional or unstructured, or alt-data for short, it can consist of consumer transaction data culled from anonymized emails; mobile app and web traffic data that indicate broad economic trends as well as what brands are popular or going out of favor; and geo-location data showing foot traffic.
Kim regards these as supplementary to the reported financial statistics that investment strategists regularly monitor.
“Using alternative data is the way the asset management industry is going,” Kim insists, not just to enhance investment models and achieve alpha, but also to effectively manage risk.
Adds Tammer Kamel, a former hedge fund risk manager and quantitative analyst who is co-founder and CEO of Toronto-based alt-data provider Quandl, “Risk management is all about being cognizant of what could happen in the future, and alternative data sets can help to answer that question. It can be an effective risk mitigation tool.”
This explains why Kim and Data Capital Management have joined the growing ranks of banks, hedge funds and asset management firms in seeking out and incorporating alternative data into their models and strategies.