How alternative data is transforming the investment and finance industry

by Brandon Russell

Written by Gunja Gargeshwari, Chief Revenue Officer (CRO) Bright Data

Last year the market for alternative data was valued at $4.5 million and is expected to grow at a compound annual growth rate of 52%! The main reason for this remarkable growth is the decision-making advantage it provides financial investors.

Many of these financial investors use alternative data to forecast the stock market, track inflation and predict earnings.

This also translates to an abundance of data to fuel Artificial Intelligence (AI) tools, numerous potential patterns and trends to uncover, and a host of opportunities to gain a competitive edge. This also means investment companies are hiring data scientists at an exponential rate to help with data-mining efforts.

What is alternative data?

Alternative data describes financial instrument information obtained from non-traditional sources, which investment professionals may seek out to supplement their conventional sources such as security and exchange commission (SEC) filings, financial records, press releases, and media reports. These alternative sources of information may include news sentiment, expert networks, or web-crawled data. There are two main sources of data – traditional data (financial reports, trading reports, SEC filings and news) and alternative data (geolocation, satellite, payments and social media).

Alternative data is generated from social media engagement, professional activities, and online searches. With every comment or review, individuals generate unstructured alternative data, which can reveal patterns of behaviour. This type of data can provide important insights for business during the decision-making process.

Alternative data also comes from businesses that tend to produce structured data. This kind of data is easier to analyse and can yield more profound insights when making financial decisions. Such data encompasses transactional data, which is created as a result of purchases, credit card transactions, and similar activities. Additionally, data obtained from government agencies, taxes, and other similar sources fall under this category.

The Internet of Things (IoT) is also another source of alternative data. This data is obtained from sensors and endpoint devices which is typically unstructured, as it is generated automatically. IoT devices such as smart TVs, Point of Sale (POS) systems, parking and traffic sensors are sources of valuable data that can offer powerful insights if analysed correctly. This data can reveal information such as how frequently people traverse a particular street or how often customers patronise a specific mall. The data generated by mobile phones and other geolocation-based systems also fall into this category.

What’s causing the spike in demand for alternative data in finance

Data is an important tool for investment management firms seeking to identify patterns and gain insights into investment products. Hedge funds were among the pioneers in leveraging data analytics technologies and big data with private equity managers quickly following suit. The early adopters of these cutting-edge approaches are also leading the way in terms of alternative data.

One of the main reasons for alternative data’s popularity is the significant advantage it gives businesses over their competitors. For example it can be used to monitor prices and inflation by tracking datasets over time, predict earnings through social media mining and search engine data to forecast a business’ earnings in a set time. It can also be used to forecast events that may impact the market.

What is the role of alternative data in model-driven investing? Model-driven investing involves the utilisation of analytical data models to uncover insights for the financial industry as a whole, with a particular focus on investment. Although most firms have not completely abandoned traditional data sources, alternative data is gaining importance for investment firms seeking innovative, new ideas to generate increased alpha (a term used in investing to describe a strategy’s ability to outperform the market or its edge).

Alternative data in practice

Over the next few years, alternative data is set to revolutionise the way investment firms and hedge funds choose investments. Paired with data analytics tools, alternative data for generating investment ideas, assessing investments, and managing portfolios can be highly potent. As investment firms and financial services realise the potential of alternative data to support the growth of both the economy and their own companies, we can expect to see widespread adoption of this kind of data.

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