Criteria for evaluating alternative data
The ultimate objective of alternative data is to provide an informational advantage in the competitive search for trading signals that produce alpha, namely positive, uncorrelated investment returns. In practice, the signals extracted from alternative datasets can be used on a standalone basis or combined with other signals as part of a quantitative strategy. Independent usage is viable if the Sharpe ratio generated by a strategy based on a single dataset is sufficiently high, but that is rare in practice. (See Chapter 4, Financial Feature Engineering – How to Research Alpha Factors, for details on signal measurement and evaluation.)
Quant firms are building libraries of alpha factors that may be weak signals individually but can produce attractive returns in combination. As highlighted in Chapter 1, Machine Learning for Trading – From Idea to Execution, investment factors should be based on a fundamental and economic...
