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?
There are traditional data sources that businesses have used for decades in determining risk management, the scope of success, the potential of a deal, and many other aspects of doing business. Some examples of traditional data sources are financial statements, earnings calls, SEC filings, stock offerings, and press releases. Alternative data provide similar answers and insights but in a different way. Alternative data can be generated by individuals, companies, or sensors, instead of by the company. Evaluating alternative data companies offers 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. Keep in mind that 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. Businesses could certainly benefit location based data as well.
What Are the Obstacles to Adopting Alternative Data?
Along with the unique benefits, there are some challenges involved in the use of alternative data. Here are three main ones.
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.
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 mobility intelligence platform and a suite of cloud-based applications make it easy to understand the movement of goods and people.
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.