The better investors are at analyzing finite information to predict a savvy business move, the more successful they will be. That’s why they are always looking for new ways to gain a clear picture that can drive those smart decisions. By using technology to gather data sets they never factored into their decisions previously, they are able to more accurately predict outcomes. Increasingly, investors are turning to alternative data in finance to accomplish this goal.
You may have heard about alternative data, but may not have a deep understanding of what it is and, more importantly, the benefits it offers. Let’s look at what alternative data is and how to find and use reliable alternative data in finance.
What Is Alternative Data?
Traditional data sources like financial statements, earnings calls, and SEC filings have been used for decades to determine risk management, potential deals, and other aspects of doing business. Alternative data is generated by individuals, companies, or sensors, rather than by the company itself. This data provides insights from different angles, resulting in a more in-depth, accurate picture of the company. Alternative data generation has dramatically increased in recent years, leading to its increased use in financial decisions.
Alternative data can provide a more in-depth, accurate picture of the company from different angles than traditional data alone. Data generation has dramatically increased in the past few years, which is spurring the trend of using alternative data in financial decisions.
What Are the Main Types of Alternative Data?
There are many types of alternative data investment firms can factor into their decisions. Public records, mobile device data, sensors, product reviews, internet activity, in-store analytics, satellite imagery, app usage, credit card transactions, social media activity, and floating vehicle data are a few of the many forms of informative, readily-available alternative data and information. Alternative data is external, meaning that it’s not generated by the company like traditional data sets. Alternative data information is also much broader than traditional data.
Simply gathering data, however, isn’t going to automatically benefit investors in the financial industry. They must understand how to digest alternative data in order for them to use it to their advantage.
How To Make Alternative Data Useful
Investors must strategically plan for the ways they can use alternative data sets by setting expectations in advance. Let’s look at four alternative data use cases.
4 Alternative Data Use Cases:
- Investment research. Analysts for private equity firms and hedge funds are able to use alternative data sets to find deals and mitigate risk. Pieces of information like mobility and property data offer a plethora of informative insights. How many people visit, and when do they come? What else is in the area? Do the people mostly walk past the property? These pieces of information, paired with traditional data sets, give investment firms a way to gauge if a deal will be profitable and is worth the investment. Alternative data in finance is simply an additional form of reassurance when making strategic investments.
- Managing portfolios. Even after an investment is made, finance companies must keep an eye on their portfolios. Alternative data in finance is a powerful information source in monitoring investment portfolios. Actions like identifying changing dynamics (a decrease in foot traffic data or credit card transactions, for example) within the investment help financial analysts predict if the investment continues to be a positive one, or they need to take action to remove it from the portfolio.
- Forecasting demand. Being able to accurately predict future consumer behavior and demand may sound a bit like a magic act, but it’s possible through alternative data sources. Knowing how consumers are engaging with stores and brands offers insight into their popularity and appeal. By reviewing data such as transaction data, investors can spot growing (or waning) trends that are essential in driving their next moves. Alternative data in finance allows brands to extrapolate trend data and forecast whether or not the next decision will be profitable.
- Competitive edge. In this case, financial analysts need information faster than the traditional channels provide. Alternative data in finance is often more readily available, helping investors build a more fully-formed idea of what’s going on in the company. Social media posts, for example, are frequent and informative. Mining this data for signals can show the investor the best moves to make, hopefully before their competitors (who may only be using traditional data sets) realize it. Even a narrow edge over the competition can garner lucrative results. In order to maintain a competitive edge, or reach the same level of insight as competitors, alternative data in finance (or any industry) is essential.
What Are the Obstacles to Adopting Alternative Data?
While alternative data offers unique benefits, there are also some challenges involved in its use. The three main obstacles include the quality of information, unequal sources, and the reliable flow of data. Investment firms need to establish best practices to address these issues and ensure that they are using accurate, timely data to make informed investment decisions.
Challenges of adopting Alternative Data in Finance
- Quality of information. It’s vital that investment firms gather and use accurate alternative data to make their business decisions. If the data is too old, vague, or corrupted, it’s worse than useless as it can cause investors to make bad, misinformed decisions. There needs to be a process for quality control of the data, so investors are confident of the data’s integrity.
- Unequal sources. Yes, there are many alternative data sources, but quantity isn’t everything. It can be difficult to disseminate information from wildly different sources ranging from social media posts to press releases to stock offerings, and more. If there aren’t best practices in place on the front end, trying to make sense of the “data dump” can be overwhelming and time-consuming.
- Reliable flow of data. Good data management isn’t a one-and-done concept. There needs to be a steady flow of accurate, timely data. If data is hit-and-miss, the investor won’t be able to glean much valuable information. Reliable alternative data in finance (or any industry) is paramount. Basing decisions off of untrustworthy alternative data is a poor financial decision waiting to happen.
What is the Future of Alternative Data?
Most experts agree that alternative data hasn’t come close to hitting its stride yet. According to Credence Research, the alternative data market is predicted to increase 40.1% compound annual growth rate between 2020 and 2027. There are currently about 1000 alternative data providers, and those are expected to condense over the next decade. Since new data sets are being created frequently, there could be new players on the field over the next few years, as well.
Companies and investment firms alike will be compelled by alternative data streams because of the breadth of available information and the ability to get it fast. There is lots of room to expand its use in the financial sector. For example, a 2021 survey from the Alternative Investment Management Association (AIMA) reported that 50% of large hedge fund companies are investing in alternative data.
In the finance industry where there’s a premium on timely, accurate information, alternative data is just beginning to be an important part of the picture. Understanding how to access quality data sources and review, analyze, and leverage the information to reach the best financial decision is key to making the initiative a fruitful one.
INRIX Provides Alternative Data for the Financial Services Industry
Finding reliable alternative data in finance is paramount to growing your investment returns and avoiding or minimizing investment risks. INRIX is a leading provider of mobility analytics that helps some of the world’s most innovative organizations use alternative data to make better investments.
Our latest solution, INRIX Trips Plus, is an all-in-one, easy to use, and tickerized geolocation alternative dataset that helps investors analyze the companies they care about and produce alpha for their portfolio.
Trips Plus combines anonymous and aggregated connected vehicle data (passenger vehicles and commercial trucks), with rich U.S. points of interest (POI) information including parking lots and building footprints. By analyzing travel habits to and from POIs – like theme parks, restaurants, hotels, and manufacturing facilities – investment managers can gain valuable insights for investment decision
Trips Plus provides access to tickers across industry sector portfolios for leading indicators. Identify trends by time of day, day of week, month, season, and year.
Why Investors Love Trips Plus:
- Trips Plus covers 450+ stock symbols, 7,400+ brands, and 12M+ US POIs. Other POI attributes allow you to further segment your analysis by location name, brand, and NAICs categories
- Connected vehicle data, vehicle classes (passenger and fleet), and footfall data from mobile devices • Accurate, precise, and fresh POI data that has been cleaned, de-duped, and ready to use
- Each trip visit to each location associated with a publicly traded company is associated with a stock symbol, along with Committee on Uniform Securities Identification Procedures (CUSIPs) and International Securities Identification Number (ISINs), which makes it easy to merge the data with your existing datasets
- Reports available either at aggregated trip counts level, or granular individual trips mapped to POIs for greater transparency
- Easily access streamlined reports for specific stock symbols across all US locations with an easy plug into AWS S3
By empowering our customers with the best alternative data, tools, and insights, INRIX provides the ground truth needed to optimize portfolio allocations, better manage risk and uncover hidden market insights.