Uncovering the alternative data points providing finance execs with an informational advantage
In this article, we will cover:
- Alternative data defined
- The alt data points that are driving investment decisions
- How alternative web data is being integrated among financial sector professionals
- Sourcing alt data
Alternative data defined
Collecting public alternative data is becoming a major part of professionals in the financial sector’s strategic approach to identifying and making the best investments currently available in their market. Traditional data may include things such as:
- Company’s Securities and Exchange Commission (SEC) filings
- Publicly filed and available quarterly financial reports
- The daily/weekly/monthly trading volume of a certain stock
Alternative financial data, on the other hand, pertains to data points that are generated by users, investors, and companies based on their real-time activities, including things like:
- Social media sentiment regarding a certain company
- Satellite imagery of factories and delivery routes which helps investment houses preempt buys/purchases before financial reports are made public (i.e., getting an informational advantage)
- Consumer’s digital transaction information pointing to the sales volume of a company/industry of interest so that investors can gauge sales volume/profitability
The alt data points that are driving investment decisions
Alternative data effects on investments can be better understood vis-à-vis the concrete data points that Venture Capital (VC) firms, portfolio managers, and angel investors are utilizing in order to make the best decisions for their organizations. These include:
- Product data and reviews – A Venture Capital firm looking to invest in a dating application, for example, will want to collect app download data from stores, as well as customer review data. It is in this way that they can see if user acquisition is on the rise or declining, as well as what aspects of the business real users thinks can be improved upon (read: value add).
- Trending corporate news items – News items can be articles published in online publications or shared on social media. Companies are monitoring these platforms and getting real-time alerts when a company in their portfolio is mentioned. For example, if there is a scandal that can negatively impact the stock price, a portfolio manager will want to know about this ASAP so he/she can offload equities at a higher price and get back into the position at a much lower price.
- Shifts in consumer demand – Modern consumers are fickle with lower brand loyalty than previous generations. Data points that shed light on shifts in consumer demand may include star ratings of specific products/brands on marketplaces or brand/product mentions on online forums.
- Industry trends – Understanding what the competitors are up to is crucial when investing. If a Private Equity (PE) firm has invested a few million dollars in an online women’s fashion brand, they will want to know what the competitors are up to. They may collect information on new collections, services (such as customized packages of clothing being sent to the consumer’s home), as well as marketing campaigns. This information can allow board members to give operational executives concrete constructive criticism.
- Social media sentiment – Working in the finance industry, social sentiment data can be one of the most powerful tools portfolio managers/VCs/PE firms have at their disposal. The best example of this was the positive and then negative sentiment on the Reddit account called Wall Street Bets regarding AMC (American Multi-Cinema). Simply put, funds that were in tune were able to save themselves from the bankruptcy that other out-of-touch investment houses experienced due to shorts they placed without having the necessary funds to cover losses.
- Search engine data – Search engines such as Yahoo, Bing, and Google are becoming major tools for investors and businesses where many consumers are beginning their purchase journeys. By mapping search trends, investors can see where ‘interest’ currently lies and as such, where markets are headed. For example, a recent uptick in searches for ‘is the tech bubble about to burst’ can provide a portfolio manager with enough information to consider reshuffling his/her holdings.
- Company compliance data – Many companies change their regulations/policies/compliance standards. This information is publicly available on their website, but investors are not always actively involved. A fund primarily concerned with investing in companies that are ESG-conscious (Environmental, Social, and Governance) may want updates regarding policy changes that influence fossil fuel emissions.
How alternative web data is being integrated among financial sector professionals
Integrating alternative data is currently having the biggest impact on Hedge Funds and Insurance companies, with 74% of the former and 72% of the latter currently incorporating alt data. In this context, 64% of finance industry professionals admitted to using alt data as part of their investment strategy.
Key financial sector survey takeaways include:
- American-based investment houses and financial institutions find it easier to integrate alt data into their operational flow when compared with their UK counterparts. (77% Vs. 49%).
- 75% of executives in the banking industry find alt data analysis as a key obstacle, while 50% find that being able to actually source alternative data is their major challenge.
Sourcing alt data
Companies in search of qualitative data collection methods may want to consider one of two options:
Option One: Automated data collection
Investment houses can now leverage a Data Collector, which enables them to put their financial data monitoring, collection, and discovery on autopilot. This is a zero-code solution that enables firms to outsource the hardware, software, and technical team tasks to a third party. In return, they receive a real-time feed of data that is sent directly to analysts or investment algorithms.
Option Two: Ready-to-use Datasets
Financial institutions are taking advantage of Datasets which are groups of information that have already been collected and are updated and enriched on a regular basis. What this functionally means is that a VC can have a potential company to invest in recommended to them over lunch, and by dinner, they can already know if it is a worthwhile endeavor. Structured Datasets are delivered in minutes, and then it is up to your team of analysts to make an informed decision.
The bottom line
Financial use cases of alt data within the context of investing is becoming more and more mainstream. But as the situation currently stands, there are still many opportunities for early adopters to gain an informational market advantage. Don’t be a lagger.