In recent years, there has been a considerable amount of buzz on alternative data in the investment & finance industries, and there is a good reason for that.
This form of data is positively shaping the financial sector by providing alternative viewpoints via real-time signals and unforeseen insights into investment opportunities, offering hedge funds competitive advantage in the market. It has also emerged as a vital tool for investment firms seeking market outperformance, known as alpha.
Companies that are slow to adopt alternative data into their investment and risk analysis are at the mercy of competitors leveraging alternative data in their securities valuation and trading signal process.
In this article, I'll be taking you through what alternative data is all about, the different types, and some vendors and providers of alternative data.
Alternative data, as the term suggests, is
non-traditional data that can provide information on how well a company or asset can perform in the future.
This is in contrast of traditional data sources like those from companies (cash flows, financial statements, press releases) and macro data (GDP, inflation rate).
Alternative data is à la mode now as it gives timely and unique insights which were previously not easily attainable. In the investment and financial world, it has become a game changer as major players like hedge funds and investment companies utilize it to generate investment alpha.
There is already an abundance of alternative data available in the data-driven financial market, the majority of which comes from the proliferation of devices. A key question remains, how can they be harvested and packaged into data that make sense and provide actionable insights?
The most prevalent users of alternative data are those in the investment sector, especially hedge funds and investment firms.
Today, the professional investor leaves little to "gut" feelings. As what Rob Matheson pointed out on MIT News, hedge funds even used location data pulled from mobile devices to predict outlook on the economy and REIT values.
Investment analysts, quant traders, and fund managers employ alternative data in their algorithms that guide their strategies in generating constantly better returns than the broad marketplace.
There are many types of alternative data sets. From email receipts to profile picture data, pretty much anything is used by investors in their quest to generate alpha. Below are some popular types of alternative data.
Social media is so prevalent and second nature right now. Individuals are significant producers of alternative data via social media activity, online reviews, and web searches. Engagements of fans and followers count on a brand’s page can indicate future receptiveness when it launches new products or new campaigns.
These platforms provide insights into how people think and express themselves. Because this information is personal, immediate, and deliberate, it represents a richer perspective into the inner workings of human nature and psychological trends than news and media.
Web browsing data is arguably the oldest form of internet activity, yet there is still an ocean of data waiting untapped. With 4 billion web pages, there is a lot of data valuable to investors.
For example, high product rankings suggest strong sales and give positive insight on the manufacturer or company. On the flip side, when a company gives too much discount out of a sudden, it may suggest weakness and desperation.
With the advent of smartphones worldwide, app data allows for new market insight, understanding of consumer demographic, and uncovering subtle behaviors based on in-app activities. This form of alternative data has become a huge factor, with mobile devices being ubiquitous in the lives of millions and billions of people.
This type of alternative data gives insights into purchase behavior, spending power, and more by analyzing the email receipt data. It is becoming useful in grocery purchases where alternative data can predict product and category demand. Also, by studying the email receipts of giant corporations like Amazon and Uber, you can derive lots of insights regarding sales, marketing, and other business aspects. And how macroeconomic conditions like inflation impact demand and purchase
Credit card data has increased in prominence as an alternative data due to the proliferation of e-commerce shopping and the increase in the purchase of online products and services. There is a lot of data generated daily from purchase behavior and trends you can utilize. Retail revenue tracking is a well-known use case in this regard. This form of alternative data can indicate a shift in spending patterns and prompt higher investments amongst the hedge funds into e-commerce-focused companies, logistics companies, and the like.
The data received from mobile devices used to track their physical location is called Geo-location data. This alternative data gives investors and hedge funds information for making location-based decisions. Movements of users in malls, shops, or even the streets can provide valuable insights into the relationships between the retail formats. So, hedge funds can use these insights to predict consumer trends.
In the heap of available alternative data, profile picture data is still a relatively new form of data. When used in synergy with the other alternative data types, it can give a competitive edge to hedge funds and investors that have the foresight to utilize it. For instance, the valuable web browsing data & mobile application data could be combined and compared using the profile picture data to get even higher levels of insights of users and consumer profiles.
This form of data is a fun and rich source of alternative data. It gives insights into the movement of employees, especially executives from Big Tech such as FAANG and gain an edge with information on their next destination - be it another company, competitor, or if they are starting a company.
Companies like Enrich Layer provide data on identifying and tracking prospective founders. Using the Employee Listing and Person Profile API endpoints, hedge funds can identify existing employees of FAANG companies, then track their change of jobs history all in one place.
For a more macro view, the hiring velocity or employee turnover rate within a company will signal to hedge funds on its situation at the moment in time. Enrich Layer currently provides an exhaustive dataset of companies and their employees for investment analysis and training AI models for this analysis. As Eric Schmidt (former CEO of Google) once said, “People are the foundation of any company’s success.” This alternative data gives a valuable edge in foreseeing the performance of a company and its future trend.
There are tons of vendors and providers in today’s market that offer alternative data. Below are the companies that offer some of the more exciting alternative data flavors mentioned above.
Enrich Layer is a strong data company with a demonstrable capacity for handling unstructured data. Its core strength in data enrichment capabilities of people and companies - offering insights into people profiles, companies profiles, work & personal email addresses and contact, jobs info, and more sets it apart.
Enrich Layer offers excellent APIs that can drive and power the data-driven applications of hedge funds and investment companies. These APIs are extremely easy to use, with attractive pricing too. They are credit-based for as low as $0.01 per profile enrichment and thus do not tie users up with bulky, heavy subscriptions or contracts like many others.
Data AI is a robust and unified data company offering primarily web-related alternative data including social media, mobile apps, web activities, games and more. Their products are ideal for hedge funds looking to build a winning mobile strategy and digital strategy - an important aspect of growth in today’s world.
Clearview excels in providing highly accurate facial recognition algorithms that have powered government agencies, security firms and the financial industry. Today, hedge funds can use their products to uncover relationships with other existing data points that might otherwise be missed.
Alternative data is a big thing now, with so many hedge funds employing it and many vendors and providers offering it. The technologies available today make it more accessible than ever before.
The question then isn't whether you should use alternative data, but when and how best to use it to get the most out of it.
