More than 88% of U.S. active large-cap funds underperformed the S&P 500 over the last five years. In Europe and Japan, 74% of active large-cap funds underperformed similar index benchmarks over the same period. Given this framework, investors have been shifting money into passive, index-tracking strategies and pushing back on the fees they are being charged.
However, if outperformance is ultimately the only certain way for active managers to attract inflows, then finding alpha ahead of everyone else should be the most important part of a portfolio manager’s job. That, of course, is easier said than done.
Active Managers Look to Alternative Data
Today’s portfolio managers have new tools in their arsenal to help them find an edge. The explosion of data being created by an increasingly interconnected world, combined with the emerging field of data science, has led to a number of asset management companies turning to alternative data sets in their quest for alpha.
Many are now looking at unique sources of alternative data—one-of-a-kind data sets generated by novel data and analysis techniques—to provide additional, non-traditional insight, resulting in a competitive advantage.
Social media data, supply chain analysis, business performance information, and web traffic are the most popular types of alternative data. Often nonstandard and unstructured in nature, alternative data usually does not integrate easily with a portfolio manager’s systems and workflows. The few firms that have successfully leveraged alternative data for alpha have teams of data scientists analyzing and parsing the data. Given the high cost and uncertain returns, such resources are often not accessible to asset management companies. So despite well-deserved industry buzz, most firms have yet to use this approach.
Despite that, alternative data will be a critical growth area in the coming years and will likely be a competitive differentiator for vendors of financial information systems, as they seek to more seamlessly integrate these data sets. But to truly turn the tide back toward active strategies, portfolio managers recognize that the best answer to their critics is to outperform the passive benchmarks.