Scouring through corporate communications and broker research isn’t enough.
Table of Contents
What Is Alternative Data?
Alternative data is data gathered from nontraditional sources. For investors, that generally means looking beyond company filings and what brokers say to get an edge in the market.
Credit card transactions, social media commentary, product reviews, and satellite imagery are examples of alternative data. These can help formulate trading ideas and contain information capable of moving share prices.
KEY TAKEAWAYS
- Alternative data is gathered outside traditional sources, such as company filings and broker research notes.
- Information that comes from unconventional places and can move share prices falls into this category.
- Examples include credit card transactions, social media commentary, product reviews, and satellite imagery.
- Demand for alternative data has rocketed, leading to more providers entering the market, greater affordability, and better technologies.
- Drawbacks include selection bias and privacy threats, and significant time could have passed before the findings became widely known and impacted share prices.
Understanding Alternative Data
Alternative data is called “alternative” because it doesn’t come from traditional sources. In investing, that generally means material distributed by a company’s investor relations department, such as management guidance, marketing presentations, earnings calls, and broker research notes. Pretty much everything else can be considered an alternative.
Classic examples of alternative data include comments made on the Internet, weather forecasts, satellite imagery, information collected by Internet of Things (IoT) sensors, employee benefit plans, and corporate jet movements. This information is out there but not necessarily easily accessible and can change sentiment in companies listed on the stock market.
Mushrooming Market
Signals buried in the data generated by digital platforms have become hot property among investors. In the battle for alpha, market participants will consider any nugget of information, increasing demand for alternative data and the companies capable of supplying it.
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This is no longer a niche, small market. Buy-side firms, such as mutual, hedge, and pension funds, now reportedly spend billions of dollars acquiring this information. And that has led to more providers entering the sector, boosting competition, affordability, and capabilities.
54.4%
The alternative data market’s estimated compound annual growth rate from 2022 to 2030.
Examples of Alternative Data
Any insightful information about a company that doesn’t come from traditional sources is considered alternative data. Plenty of things fall under this category, with some of the most useful and popular including:
Social Sentiment and Product Reviews
Much information is shared on the internet and can be used to gauge popular opinion about companies trading on the stock market. Likes, comments, and reviews paint how paying customers feel about the goods or services offered, are influential, and can indicate future revenues.
Web Traffic and App Usage
A sudden spike or drop in website or app visits can be informative. Views don’t necessarily translate into purchases, though they do signify interest—and that’s generally a good thing for a company and its share price.
Satellite Imagery
Taking images of planet Earth from outer space serves all types of purposes. When it comes to investing, it can, among other things, be used to check out construction projects, the prosperity of oil fields, how many cars are in store parking lots, and monitor natural disasters and other issues that impact supply chains.
Internet of Things
Connecting devices to the internet is a game changer not only for product efficiency but also for investors. Once they are online, the information collected is recorded and can be shared. Some of this data will be useless. Other bits, however, could prove insightful and make those privy to them lots of money.
Important: Alternative data is controversial because it may violate privacy, which could have repercussions later on and lead to tighter regulation.
Jet Tracking
Keeping tabs on the movements of certain people is very lucrative. Takeovers, private equity deals, and high-profile investors buying stakes in companies can have huge repercussions for share prices and may be spottable beforehand by tracking corporate aviation movements.
How Is Alternative Data Collected and Distributed?
Alternative data is plucked from various sources, including sensors, satellites, public records, the internet, financial transactions, and mobile devices. Technology developed by specialist providers is mainly used to collect the raw data. The findings are then typically assessed by a combination of technology and humans before being packaged for consumption.
There are now hundreds of companies that specialize in alternative data. Some focus on specific topics, such as social media or private jet movements, while others offer more complete packages.
Who Uses Alternative Data?
When alternative data started to take off in the mid-2000s, its recipients were mainly hedge funds. Back then, alternative data was prohibitively expensive and catered exclusively to wealthy traders looking to make quick moves and profits.
Nowadays, alternative data is a common fixture in the offices of all types of investment firms. Its main users are algorithmic traders, or quants, who leverage the data to build computer models predominantly for trading equities. However, longer-term, buy-and-hold investors also take positions based on alternative data findings.
Industry insiders also say that companies frequently base corporate decisions on the information churned out by alternative data and that private equity firms use this data when weighing up targets and striking deals.
Disadvantages of Alternative Data
Alternative data can be very lucrative if used correctly. However, it’s not flawless and, like any other indicator, should only be followed up on after careful due diligence and other analysis.
One of the biggest drawbacks is the risk that the data only tells part of a story and is not representative. While technology keeps on improving, it may not be capable of spotting everything and could overlook some important information.
Other notable downsides of alternative data include concerns that it is acquired by invading privacy and that it can take quite a bit of time for interesting findings to reach the mainstream and impact share prices.
1. Retail investors generally have two options:
Ans: Retail investors generally have two options:
Do some digging themselves using the resources available to them?
Pay a specialist firm to send them their data.
2. Why Is Alternative Data Important?
Ans: The more information you have about a potential investment, the better. Technological advancements make it possible to build a more complete picture of a company beyond its most recent financial statement and corporate communication.
3. How Much Has the Alternative Data Market Grown?
Ans: Demand for alternative data has rocketed over the past decade. Previously, this information was only accessible to a select few investors. Now, everyone wants to get in on the action, which has led to more options and greater affordability.
The Bottom Line
All investors should be aware of alternative data. When we buy shares, we are betting that the company’s earnings will rise, leading to an increase in value. Knowledge is key here, and more information about the subject increases the probability of making the right call.
Traditional data sources like financial statements will always be critical to stock analysis. But they tend to be backward-looking and self-promoting and only tell us so much. To gain an edge and have a greater chance of making money, it’s necessary to dig deeper. That’s where alternative data comes in handy. When used properly, data extracted from nontraditional sources can give us a more complete picture of a company and its prospects.
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