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Dec 20, 2023
Why is using data and data science both interesting and important within financial markets?
Using data as part of the investment management process is far
from new - but why is using data and data science both interesting
and important within financial markets? And why is using
alternative data so valuable?
We explored these topics at our recent
S&P Global Quantitative Investment Management Forum in
London.
Firstly, how do we define alternative data? Is it defined by asset
class, or geography - anything outside of Equities, or the US? We
observe for example the use of our proprietary capital flow data
and systematic credit strategies rising. Is alternative data
defined by public vs private markets, or by time-frequency - such
as tick data? Does reliability mark the boundary between
traditional and alternative data sets? For example, if a truly
unique data set disappears there is nothing to replace it, whereas
traditional data could be defined as having multiple sources. Is
alternative data defined as data used within a financial market
context but created for or originating from a different purpose? Or
is alternative data defined by human and emotional bias - data so
differentiated it is deemed to incur more risk, to generate
alpha?
Ultimately, data is a spectrum between traditional and alternative,
it is not binary - and importantly, and as straightforward as it
may seem, data conveys information. Here are the thoughts
of our panel on why and how best to leverage data and to optimize
data-driven strategies:
- Data, and alternative data, provides a better connection with
the real economy - a more effective ability to calculate and price
risk, and to reconcile the price-formation process with the
changing state of the economy.
- Data science is now required at every level of the value chain
- from data collection, alpha signal extraction and portfolio
construction, to trade/strategy execution and risk management. Data
science at scale is now a requirement to gain a competitive
advantage, especially when moving into new/alternative asset
classes.
- As such - collect as much data as possible, from as close to
the source as possible, understand its specificities and remove the
data bias for each desired usage. Noise removal is imperative to
understand the true signals offered by the data.
- However, data must not be blindly injected into systems. Data
must be used with intentionality and purpose to fulfil a specific
information gap. This approach will prove more additive over time
than purely focusing on returns.
- Combining data sets is more powerful than using data in
isolation - but contextualization is important. Combining market
data + traditional data + alternative data and overlaying this with
domain expertise, will enable you to build a complete picture of
the assets you are interested in.
- Mapping is key - alternative data needs to be mapped to become
meaningful, and mapping between datasets and between equity and
fixed income assets remains a significant challenge. Efficient and
accurate mapping of data relationships is essential to extract more
signal from the 'noise', rather than building a picture manually.
Building more complex data relationships will provide an
information advantage. Our S&P Global Cross Reference suite
allows seamless linking of reference data by company, security, and
industry to better manage data integration and minimize manual
processes:
Cross Reference Services.
- Cross-Asset signals: To further overcome the challenge of
mapping between asset classes as part of a data-driven cross-asset
strategy, S&P Global's
Alpha Signals factor library provides a suite of credit-derived
equity factors, our <span/>Bond-Linked Equity Signals,
built on top of our proprietary
CDS Pricing Dataset and
Bond Pricing Data, using a robust mapping algorithm. The
quantitative feed provides a daily view of how credit markets
impact equities, and these indicators have proven to provide unique
information that has low commonality with both fundamental and
alternative datasets. Our innovation has enabled us to create
alpha-generative signals originated from our mapping capabilities,
helping our customers make the connection between credit and equity
markets. Furthermore, our quantitative analysts have extended this
research to combine our Bond-Linked Equity Factors with
Equity Short Interest for an enhanced security selection
process in large-cap equities in the US and Developed Europe.
- Returning to the thematic of traditional vs alternative data,
there are still significant insights to be gained from traditional
data, which remains the foundation of investment management, as
demonstrated by our pioneering
S&P Capital IQ Financials Dataset, point in time
Compustat® Financials Dataset and comprehensive
S&P Capital IQ Estimates Dataset.
- Moreover, our product innovation enables us to provide new
alternative insights for our customers by leveraging our
traditional data sets, for example with our forthcoming
S&P Global Company Connections: Detailed Estimates product
based on sell-side analyst estimates. Sell-side analyst coverage
data provides a new and rich source of establishing connections
between firms, as analysts (given their industry expertise) are
likely to cover fundamentally related firms. Company to company
connections are derived from the number of shared sell-side
analysts between a pair of companies. As our panel highlights,
enhanced data signals can be generated from the linking of data
through company relationships.
- The extraction of textual and tonal data by machine learning is
an important step forward, and with increased focus by the industry
on LLMs, the importance of textual data is significantly growing.
Text is not only used for model-building, but is also increasingly
used for better timing advantage in execution algorithms and for
improved risk management, as well as to enhance alpha
generation.
- Text is also a key area of growth for our own S&P Global
products: most unstructured data is in textual form from sources
such as emails, transcripts, articles and documents. These text
files are usually difficult, time-consuming and expensive to
analyze and utilize. S&P Global identifies primary sources of
textual information that can be parsed and structured for ease of
use, bypassing the entire process of sourcing, cleansing and
maintaining the data, while enabling metadata tagging and linking
to other datasets such as financials and estimates. Our
Textual Data Suite includes machine-readable transcripts,
filings and broker research, as well as our
Textual Data Analytics: Sentiment Scores & Behavioral Metrics
Dataset.
- Combining our cross-asset and textual themes, new research from our Quantamental Research team combines our Textual Data Analytics & Credit Default Swap Pricing datasets to examine the effect of earnings call sentiment derived from our earnings call transcripts on CDS spreads: Watch Your Language: Executives' Remarks on Earnings Calls Impact CDS Spreads
In conclusion, data is core to the investment management process
- increasingly so with LLMs becoming more mainstream - and
alternative data is becoming more necessary. However, more data and
bigger models are not necessarily better - the key is to understand
what you are asking for, and to keep the intention and application
of the data in focus.
And as for what defines traditional vs alternative data? In a world
of AI, nothing will replace human understanding of data,
and this is what ultimately unites all data.
For more information on how to access these data sets, please
contact the sales team at: h-ihsm-global-equitysalesspecialists@spglobal.com
or visit www.marketplace.spglobal.com.
Please feel free to download a PDF version of this
blog.
S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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