3 Quantitative Strategies Based on Alternative Data

What is the value of information? 

In modern-day investing information is the biggest advantage an investor can hold. And with the advent of alternative data, one has loads of varied intelligence to look at. 

In fact, alternative data has been called “the deepest, least utilized alpha source in the world today” by the NASDAQ platform for alternative data, Quandl. 

Determined to maximize its potential, investors and funds are demonstrating a growing interest in testing a wide range of strategies involving the use of alternative data as an alpha generator. 

Below we highlight three different quantitative strategies that have shown significant stock returns. 

1) Google Search Volume Strategy 

Quantpedia - a platform that has collected a database of 700+ quantitative strategies based on academic research - includes some 100 strategies based on alternative data. 

One of these is based on Google Search. The strategy encompasses buying stocks when there is low attention attached to them and selling them when they start to pick up higher search traffic. The premise is that: 

these stocks are underpriced 
therefore, they are associated with lower risk 

Below are details and results the strategy has yielded.

Source: Quantpedia

2) Forward-Looking Government Receivables Strategy

Government procurement data, while publicly available, is difficult to process by investors, but as a TenderAlpha study found, there is strong evidence that information about a firm’s receivables from US federal government contract awards can be used to predict its stock returns. 

A variety of trading strategies has been backtested using federal government receivables as a data source. All of them have generated excess returns. 

For example, utilizing the ‘unexpected government receivables’ (UGR) signal, a market-cap weighted version of a trading strategy that goes long in stocks that are in the highest tercile of UGR and short stocks with no government receivables, and equally weights stocks within the long and short portfolios, achieves alpha ranging from 5.4% to 7.1% per year depending on the factor model used. 

Source: TenderAlpha

3) Media Sentiment as an Investment Signal 

In Refinitiv’s latest white paper ‘The value of alternative data: The case for media sentiment’, the financial market data provider uses backtesting to compare the performance of portfolios when using Refinitiv Media Sentiment as a standalone investment signal, versus a traditional multi-factor strategy or the S&P500 benchmark.

The study showed that using the alternative data set of media sentiment as a single-factor investment strategy achieved results across return, volatility and the Sharpe ratio on a par with those achieved when using a multi-factor strategy.

For long-only investors, both the multi-factor and sentiment-only strategies delivered between 2% and 2.5% excess return over the S&P benchmark.

When tested on long-short portfolios, the sentiment-only strategy even began to outperform the multi-factor model.

Source: Refinitiv

In another key finding, the alternative data strategy delivered excess returns over the S&P benchmark of between 3% and 5.5% for long-short portfolios (compared to 2% and 2.5% for long-only).

Furthermore, when the portfolios were made up of 50% or more short positions, the sentiment-only strategy began to outperform both the benchmark and the multi-factor strategy.

In this case, the higher the short percentage, the higher the returns – and the more beneficial the sentiment-only strategy over the multi-factor model and benchmark.

Final Remarks

There are a couple of considerations to take into account when discussing alternative data. 

First of all, in order to get the most out of it, it is important to combine different datasets so that you gain detailed knowledge and connect a variety of insights into a more complete overview of a business.

Secondly, you need to remember that any alt data type that becomes popular quickly loses its outperformance advantage, therefore, there is a constant need of discovering new alt data sources to get back the edge. That being said, you should be keeping an eye for new opportunities at all times. 

At TenderAlpha, we provide dynamic, daily updates to our government contracts data, so that investors have the most recent and relevant information from a verified alternative data source, which are official government procurement platforms. To get to know more about the impact of government contract awards on stock price, take a look at two of our academic studies: 

Government Receivables as a Stock Market Signal
The Impact of Green Contract Awards on Stock Returns

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