Over the past few years, alternative data has become an increasingly popular research tool in the world of investing, especially among hedge fund managers and financial institutions as investors perpetually search for new ways to secure a competitive advantage over their rivals.
Even though the global alternative data market is currently valued at $1.72 billion, many people involved in the industry still believe it to be in its infancy, given the fact that we are continuing to find new ways to derive insights from various non-traditional data sources.
With that said, let’s take a closer look into what alternative data is and the five key information sources it depends on.
What is alternative data?
Alternative data is auxiliary financial information that is gathered outside of traditional/official sources. This data is commonly used to help individuals and businesses make better investment decisions, giving them an edge over their competitors.
In the past, almost everybody had to rely on the same traditional data sources, typically in the form of structured data collected from companies, such as financial statements, presentations, SEC filings, sales figures – plus the information from the markets such as prices and volumes. While these metrics are valuable to investors, they don’t usually give a complete picture of the company’s current health.
After all, traditional data sources are endogenous to financial markets, so they are naturally limited in their scope.
On the other hand, alternative data sources do not originate in financial markets or from internal company documents. Instead, they are an outcome of the global data explosion of the digital era, generated by the activities of businesses and consumers of all types. Consequently, alternative data sets are typically offered in an unstructured format, making them different from most traditional data sets and challenging to integrate and consume.
Since alternative data is often not easily accessible (or easily analyzed), this means that the individuals who are prepared to go the extra mile to incorporate this data into their fundamental research can gain the upper hand over those who do not. When used together with information from traditional data sources, alternative data give investors a full picture of an investment opportunity, leading to greater accuracy and more profitable decisions.
There’s no disputing that the internet has transformed our world and the way we communicate with one another. As a result, investors now have access to an almost incomprehensible amount of digital data that they can use to obtain insights into companies and their customers. In general, this type of data consists of information regarding web traffic, popular online searches, demographics, click-through rates, and engagement across various channels.
This information is extremely useful for determining the effectiveness of advertising efforts and the popularity of a company’s websites or products. It also gives valuable insights for market research and e-commerce organizations. Using this data, investors may pick the essential indicators to analyze and benchmark company performance and anticipate growth. This enables investors and hedge fund managers to strengthen their hypotheses and find new investment opportunities.
Social sentiment data
Public perception is a powerful thing, and before now, we haven’t been able to come up with any surefire way of quantifying public opinion and sentiment towards a particular company.
However, thanks to the internet and the various social media platforms, we now have the ability to analyze large sets of social data and communications to derive insights that will give investors a better understanding of current trends and the perception of any given brand. Through the processing of social media posts and comments, investors can get a better gauge of public reactions to a product release, event, or public announcement, which gives clues into the viability of a particular investment decision.
Consumer transaction data
Point-of-sale transactions and credit card data are often used by investors who wish to track retail revenue outside of the traditional sources. Often this gives a different perspective on a company’s sales figures and serves as a useful reference to gauge the success of product launches and other major events.
On top of this, most investors have to wait for quarterly reports where public companies disclose their sales reports. Instead of waiting for these releases, transaction data gives real-time, highly accurate sales figures – the only caveat is that this type of data can often be prohibitively expensive to obtain.
Geolocation and satellite data is another form of alternative data that investors can use to gain insights into a company or industry they are considering investing in. In general, this type of data is received from electronic devices used to track the physical locations and movements of both people and shipments (usually through GPS).
Geolocation data offers a wide range of applications, from allowing individuals to look at photos of parking lots to see how many cars are parked at different times to tracking global demand for certain products and services through shipment patterns.
Last but not least, investors can analyze the information derived from weather patterns to determine how much or what kind of agricultural output can be anticipated from a location and the types of commodities that may be accessible.
This is not the typical run-of-the-mill data that you’d get from traditional sources. If used correctly (and accurately), investors can gain a significant competitive advantage by anticipating when certain types of crops, grains, or other harvests may be negatively (or positively) impacted by the weather. All of these factors have the potential for huge impact on various global supply chains.
Alternative data is a tool that can help investors make more sound decisions as it gives them the means to acquire competitive insights that are typically unavailable through traditional sources of investment information such as SEC filings, financial reports, or market data.
Looking to the future, it’s highly likely that alternative data will continue to play an even larger role in the financial world as hedge funds, money managers, and even retail investors find new ways to generate alpha with the copious amounts of non-traditional data available in our world today.