Alternative data (or alt data) is data produced for non-financial purposes that predict financial outcomes. This could range from satellite and security imagery, smartphone geolocation data, credit card use, and other kinds of standardized transactional data.
Investment banks and hedge funds are some of the largest consumers of alt data, as investors seek new data sources to enable faster insight for better decision-making. This is primarily because alt data can help understand company performance and potential impacts.
Consumption of Alternative Data
Alt data is quickly being adopted globally, with 53% of companies using it since 2017. Presently, an increasing number of businesses are recognizing the value of alternative data as the world is improvising with technological advancements. Total buy-side spending jumped from $232 million in 2016 to $1.08 billion in 2019.
Companies that know how to utilize alternative data properly can greatly improve their decision-making and gain a significant competitive advantage. There are a nearly infinite number of applications and companies that are using alternative data for their benefit.
As mentioned above, alternative data is quite beneficial for hedge funds. Seemingly insignificant data on things like basic retail transactions helps supply investors with loads of information and insight. Shopping habits, purchasing decisions, demographics, and much more can help to understand a consumer significantly better and predict the state of the market. Satellites can also monitor parking lots to see how full they are to determine how popular a store is.
As of April 2019, over 400 firms were selling alternative data to hedge funds, and they are expected to pull in $1 billion in profit by doing so.
Web Data Integration
One particular process that makes alternative data useful is web data integration. This is a process that helps to aggregate and normalize data for easy use. Within the last three years, there has been a large influx in hedge fund managers and investment firms using alternative data, plugging them into machine learning algorithms for better decision-making.
Predicting Geo-Political Risks
Politics influences the economy, and as such, leveraging key alternative data can give decision-makers a heads-up to make more accurate predictions and better manage geopolitical risk.
A common example is monitoring the moves of elite and top business leaders by following their private jets’ path. A stock research firm did exactly that, soon after notifying clients that Warren Buffet might be getting into a major energy deal. This speculation came from data that reported spotting Occidental Petroleum Corporation’s Gulfstream V at the Omaha airport. This led to the belief that there was a meeting with Warren Buffet’s Berkshire Hathaway Inc. Shortly after these reports, Buffet announced he invested $10 billion in the company.
Privacy Concerns Regarding Alternative Data
Considering the current pandemic situation, most industries’ common consensus is that mass data collection is valuable but necessary. While alt data can definitely help to improve decisions across the board, one main concern is what happens with all this data once the crisis passes.
From health to behavior, we live in a world where sensitive information is passed on to governments via apps and websites used. For instance, it comes as no surprise that PayPal shares personal data with government agencies.
Learn to make sense of your data
For all the reasons mentioned above, this is why investors and companies need to ensure they are working with firms where data-security is top priority. Furthermore, even when it comes to using alt data for making better decisions, ensuring the quality of that data can also be tricky.
As we move toward a more data-informed landscape in the years to come, companies like Chain of Demand help to give investors and hedge funds access to millions of data points, safely and securely. With data being our top priority, we help make sense of the data and provide valuable, insightful look into the future of the market.