Efficient Markets and Data

src: MS

Simple but surprising:

• If you can buy better or faster data than everyone else, you have a big advantage and can make a lot of money.
• If everyone can buy better or faster data, then everyone has to: If you don’t, then you have a big disadvantage compared to the people who do, and you can lose a lot of money.
• Either way, the person selling the better or faster data can make a lot of money.

Further elaboration:

But there is also a contrary viewpoint that actually it has been particularly useless and overrated in these weird times. Here, for instance, is this guy:

Anthony Lawler, head of GAM Systematic, said his firm used alternative data but added that such information had not been behind his funds’ gains last year, nor had it driven markets this year.

“Daily credit card data or footfall data didn’t lead the recovery in [stock] prices. What led the recovery was investor sentiment, animal spirits and a belief in a better future," he said. "For none of that could you use innovative photographic, credit card or shipping data."

"We remain of the view that alternative data is creating value for the data providers, but not yet the investors."

That’s a good quote, but the point I want to make is about the word “yet.” You’d sort of expect a life cycle in which (1) initially alternative data is promising but not very useful, so hedge funds buy it but it doesn’t work very well, so it creates value for data providers but not for investors, (2) then alternative data becomes more refined and useful, so hedge funds buy it and it works, so it creates value for data providers and for investors, but (3) then alternative data becomes ubiquitous, so hedge funds all buy it and the advantage of using it is competed away, so it once again creates value for data providers but not for investors.