Wall Street's appetite for alternative data has turned into a gold rush, but investors say there's more dirt than nuggets

REUTERS/Damir Sagolj

Investors say there is frustration in the industry over not getting enough value out of alternative data sets.

• Investors speaking on a panel in New York on Tuesday said they struggle to find viable alternative data providers.
• Data sets often times don't meet their minimum requirements for usage.
• Investors said even the data that is up to par often times can't be integrated into trading strategies.

Alternative data might be one of the hottest industries on Wall Street, but data experts at quantitative hedge funds said the booming space has been difficult to generate incredible returns, despite seemingly new providers popping up daily.

Lisa Schirf, the former chief operating officer of the data strategies group and AI research at Citadel, said the pipeline for alternative data is hard to manage.

"The data is kind of like a gold rush, and there are some kernels, but there is a lot of people walking away with dirt," said Schirf, who was speaking at conference in New York Tuesday. "There is clearly some frustration that not everyone is seeing all the value that they want out of all the data they are seeing."

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Fellow panelist Olga Kokareva, head of data sourcing and strategy at quant fund Quantstellation, said data vendors need to do their homework to understand what investors specifically are looking for with their sets. Kokareva said the majority of vendors she speaks to don't have data that meet her criteria to be used.

The most common issues that stop data from being used include not having a large enough coverage area, or lacking a deep enough history. However, Kokareva said she remains in contact with data providers that aren't qualified to see if they make the appropriate changes.

Even for the sets that do pass Kokareva's bar for usage, only a few are incorporated into actual trading strategies.

"It should be a meaningful amount of target alpha for you to justify the cost of the data set and cost of working with the data set. ... You have to see projected ROI with the data set," Kokareva said. "It is still pretty low. We would like it to be higher."

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Rob Morse, head of data strategy and sourcing at quant hedge fund PDT Partners, said his firm doesn't disclose the percentage of alternative data sets that make it into trading strategies, but noted that they've seen improvements in the numbers. He gave two reasons.

First, he said vendors are better prepared, pushing out fewer data sets with "fatal flaws" that make the information unusable for investors. Second, his fund has a more focused approach to how it sources data.

"Finding data sets that are truly solving problems for us that are not just data sets," Morse said. "Developing an intimate unstanding of what your internal contingent or internal client is trying to do. What they are trying to solve. What their investment strategy actually is. And what moves the needle for it. And then sourcing data sets and pushing those data sets out the priority que."