How Investment Funds Leverage Alternative Data to Add Alpha

As technology evolves, information has become more accessible to us all. This includes information about trading and the stock market. The emergence of all these readily available information sources has made it much more difficult for investors to find a competitive advantage over others.

Alternative data has become a popular option for traders. Alternative data gives new insights to investors and helps them make informed decisions about the future of their portfolios. But alternative data sources aren’t always accessible. This is because if there was open access to these sources, anyone could use them and any competitive advantage they’d give would be nullified. For this reason, there are often many costs involved with obtaining alternative data, and this is often done through a brokerage service. Soft dollars are one trades cost involved in unlocking alternative data sources that can stand in the way of the large majority of small-time investors accessing these useful data sources.

What are soft dollars?

Soft dollars refer to the fees that brokerage firms charge for their research and other services that they provide. These fees are typically paid to brokers by money managers and mutual fund managers. Soft dollars are commissions from clients that fund managers use to acquire the services of a brokerage firm. The brokerage services that money managers are purchasing with the use of soft dollars from client commissions are meant to aid in decision-making for investors. In these cases, soft dollar arrangements using commission dollars are completely legal, and it’s not considered to be insider trading.

The services that mutual fund investment managers can purchase from a broker go beyond just simple research services. Investment managers often create soft dollar arrangements with broker-dealers and use commissions to purchase in-depth company research, hardware, software, industry analyses, future projections, and daily updates of the stock market. The more technical and data-based research a broker-dealer can provide, the better informed the investors are before making investment decisions. The only issue with the soft dollar and soft dollar arrangements is that the cost of research and additional services often makes brokers’ research services inaccessible to investors.

How is alternative data collected and used?

Advanced analytics are often used during brokerage research to help predict future events of the market and specific companies. The use of advanced analytics provides critical data points and information that help make predictions about future trends and scenarios. Predictive analytics are an essential form of advanced analytics that use analytics techniques to decipher a company’s big data and from this create actionable insights for investors.

Predictive analytics create predictive models using a company’s current and historical data to track behaviors throughout time. Data analytics are gathered using artificial intelligence, machine learning, data science, advanced algorithms, statistical models, and visualizations. All of these elements combined create valuable insights for investment advisers to use in order to guide their clients to make the right investment decisions.

Actionable insights that are created using big data analytics are crucial for investment advisors. Big data refers to the entirety of a company’s data sources. Because of the sheer volume of data that is retrieved from these sources, not all data analytics researchers offer big data analytics services. Predictive analytics always uses big data, and this form of advanced analytics is the best way to efficiently translate and decipher what information a company’s big data has to offer. These analytics tools are often completely automated through advanced software integrations.

Different analysts and data analytics companies offer software with their own unique features, algorithms, artificial intelligence and machine learning, and analytics techniques. The best way for investors to access these critical insights is to find a data analytics company that offers affordable and advanced software and analyses.

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