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Comment by logicslave | Hacker News Reader

Honestly if you have a predictive data set, most likely it is more profitable to use it to invest yourself than it is to sell it. Its like a successful startup raising VC funding, the good ones dont need the investors, the bad ones do.

Source is I used to work in this space. Clearly there are operational difficulties to investing and serious domain knowledge but if you have data with alpha, its worth insane amounts of money (seven figures a month).

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I disagree. Sell-side research using so-called alternative data is a different skillset from trading and buy-side research. Some datasets comprise sufficient alpha in of themselves to trade on, some datasets have some edge (i.e. are not yet priced in) but require more sophisticated analysis. Good data is necessary but insufficient for developing viable trading strategies.

Source: Also used to work in this space. Still do, but not on the sell-side anymore. I wouldn't give trading capital to someone if their entire pitch was just possession of exclusive, useful data.

I used to work in buy side research. Most of the good datasets have already been stripped of alpha, but are bought and sold anyways because funds have to know what the data is saying to keep up with the other funds. A true new dataset with separate alpha is a goldmine. There are ones that add to the edge, and require quants, but in my experience all the valuable alternative data can be normalized and then back tested to the stock price. If you cant do that with it, its not that valuable outside a few hedge funds.

Surely a hedge fund has three advantages compared to investing yourself:

* Higher amounts of money to invest immediately, so they can better capitalise on the data quickly.

* Balance investment risk over many different assets - they can take a higher degree of risk/reward as any single failure in investment is unlikely to topple them

* Combine multiple data sets with other trading strategies to maximise returns.

True.

I'd ask: "If this data is truly useful in a financial market context, why are you selling it instead investing with it yourself? What data are you collecting that you're not* selling?"

Because sometimes the data is useful when combined with other data you might not have yourself. Example: you have data on number of Netflix subs. That’s great. It would be even more useful if you combine that with Netflix churn data.

You can think of company analysis as a jigsaw puzzle. You may have a few pieces. That by itself isn’t useful unless u have the other pieces.

This works in theory, but in practice when you start making estimates of engagement numbers that are twice removed from the underlying stock price, you get into trouble. The deeper you get away from a direct relationship to stock price, the harder it is to predict something in practice.

What you're saying is correct but also puts a non-sophisticated seller in a poor negotiating position. They do not know what existing data the buyer uses or how their data can be complementary to anything.

That's why start-high and walk away is a fair opening gambit in negotiations of this sort.

You can always come back around, but if they pursue you, that tells you something about their appetite.

I mean, I guess that's something that you can do but it's likely to get you laughed out of the room and greatly encourage them to reverse engineer whatever you were trying to sell.

So how would you play that scenario?

If the data made a few dollars per thousand dollars traded, it would take you a long time to make meaningful income from it, as opposed to a market maker.

This is a good heuristic for the sale of trading strategies. If someone has a viable trading strategy, they should be raising capital or joining a prop shop instead of selling it.

But it's not maximally rational to trade on data instead of selling it if you don't have any experience trading.

And even if you're somehow able to figure out a trading strategy on this with no expertise, there are extremely few data sources that are actually proprietary so alpha decay is a very real thing.

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