Analysts need data to deepen their findings. To this end, they try to use sources such as news and web-based databases. There are many traditional sources, including stock market data, financial records, and published reports. However, investment management companies often use alternative data to identify their clients’ behavioral patterns and find accurate investment insights. Alternative data comes from a variety of sources, with several use cases. In the financial landscape, more and more investors are turning their heads and discovering just how this new source of data can help to transform their decisions.
What Is The Role of Alternative Data In Investment?
Investment using alternative data refers to analytical data models in finding concepts related to the financial and investment sector. As companies better understand the value of technical information data, the effects on finance and various economic sectors will be broader. Here are some suggestions on how to look or get a look at the role of alternative data in investment;
- Investment pattern — Individual investment pattern is based on the data they form from news websites, other people’s comments and other investors’ investment behavior.
- Retail Chains — Imagine retail companies speeding up their decisions by producing and assembling their products based on consumer behavior on virtual social networks.
- Insurance companies — Insurance companies conduct their risk assessment based on geolocation data and natural events.
Alternative data plays a vital role in investment and finance by creating innovation and creating ideas. However, analyzing the vast amount of data generated is also critical. Machine learning and artificial intelligence can also process this data very quickly. In general, AI-based models help investment companies to find the correct patterns to make accurate decisions.
Different types of alternative data
Investors and financial and investment specialists use alternative data to identify the target market and make their policies more effective. Different types of alternative data related to finance and investment and their application in the relevant fields are mentioned below:
- Web search — Like click-through rates and web demographics, this data is beneficial for marketing research and e-commerce decision-making.
- Social media data — This data includes consumer behavior and their reactions to content and a brand. Comments, online transactions, and posts about products show the trend of market change and consumer behavior accordingly.
- Geolocation data — This data helps companies identify the location of high-demand products. Housing investors can use this type of data.
- Credit card-based transactions — Transaction data analyzes consumer behavior in a way that identifies their buying patterns for businesses. This data will significantly affect retail revenue.
- PoS Transactions — These transactions provide information to businesses about sales volume, consumer behavior, best-selling products, and payment methods.
- Satellite imagery — This data is a good source for algorithms and analytical tools that only lead to promising findings for businesses. For example, assessing the consumer’s economic behavior in a particular geographical area and the demographics of an area to buy from existing stores can help individuals and businesses.
Investment-related applications of alternative data
Over the years, alternative data have revolutionized the pattern of investment and hedge funds. Investors are using alternative data in idea generation, development of investment methods and portfolio management, especially when combined with data analysis tools. The following are some of the essential applications of alternative data in finance and investment:
- Price-related changes trend: Using available price-related data helps companies to be able to follow the changes and effects of inflation well.
- Use of social networks: To predict revenue, an asset manager can explore data related to social networks and predict the company’s revenue over some time can use search engines data.
- Use of payment gateway data: A hedge fund can use a combination of credit card transactions and geolocation data of an investment company to evaluate and track customer performance online.
- Predicting market trends: Comments on social networks and web data have many uses to predict market trends and future events.
Advantages and challenges of alternative data
Proper use of alternative data through machine learning and artificial intelligence in finance and investment is a significant advantage. because it provides valuable information about consumer behavior and helps generate alpha. However, alternative data can also present challenges.
The benefits of alternative data
The most important advantage of using alternative data is to enable companies to compare, evaluate information and generate alpha. In this way, alternative data can improve the company’s knowledge of its competitors and the market at large, thereby improving its performance. Another significant advantage of alternative data is the capacity building of predicted activities using alternative data. Using new sources of information, investors can make more accurate predictions of market trends.
Challenges of alternative data
In general, the limitations alternative data can provide are
- Incomplete, unclean data
- Volume constraints
- Potential low data quality
- Lack of data validation process
- The absence of data history for backups
Alternative data the way you need it
Financial and investment companies use alternative data to increase forecast accuracy, maximize revenue, and reduce unforeseen risks. New data sources provide financial security, and hedge funds also make the most of data analysis technology. Also, the rapid production of alternative data through emails, social networks, satellites, financial reports, and other sources has created an excellent opportunity to increase profits for investors.
These days, retail investors are getting access to a range of opportunities, all at their fingertips. In a time where companies are expected to go through digital transformation, it is difficult to find providers that can help make sense of all the data. Companies like Chain of Demand help people in the finance industry do exactly this, by not only providing access to millions of data points but also give insights as well.