When it comes to making decisions, all of us want the best information possible. Whether we’re looking at product reviews online before making a purchase or analyzing more complex financial information before making an investment, the information we’re looking at and utilizing matters. As the economy continues to shift and move in new directions all the time, there are certain strategies investors can use to stay ahead of the curve and lead the pack. That’s where alternative data comes in.
Deloitte analysts believe that alternative data will transform active investment management over the next five years and play a crucial role in fund managers’ decisions in the future, according to a recent report from the Deloitte Center for for Financial Services. Furthermore, Deloitte’s analysts expect an increase in risk for those not adapting to the new information stating that:
“Those firms that do not update their investment processes within that time frame could face strategic risks, and might very well be outmaneuvered by competitors that effectively incorporate alternative data into their securities valuation and trading signal processes.”
Alternative Data 101
Though investors may have heard of the importance of alternative data, a lot of people still don’t have a clear understanding of exactly what it is or how it’s used. To keep things simple, alternative data is essentially any important data/information that does not come from traditional sources. To use a clear example, business owners may have traditional data like the financial reports from their retail stores in a shopping center, but alternative data includes things like imaging taken from the parking lot over an extended period of time which can then be used to correlate parking lot traffic with sales. Store owners can then use that combined alternative data to make more informed decisions about their business or other future operations.
In other contexts, alternative data may include things like sensors and information gathered on the ground in the agricultural sector that can be used to make decisions about future investments in different regions and health of the crops there. Ultimately, alternative data has a very broad definition and includes any data that’s not accessed via traditional sources. Depending on the industry, there are no limits on what investors can use alternative data for. In fact, spending on alternative data to assist in investment decisions is set to grow significantly in 2018, especially for hedge funds.
Why Alternative Data Matters
The next question investors have when seeing how much the alternative data market is projected to expand is why? Unlike other forms of traditional data from companies and different sectors of the economy, alternative data allows investors to develop individualized approaches for different investment strategies. When using new forms of alternative data, they’re not designed to replace traditional data, but instead to complement what investors already know. By leveraging both data sources together, investors gain access to a more in-depth picture of the subject they’re looking at. Investors can decide what data they want to incorporate in their strategy and differentiate themselves from the competition to stay competitive and at the forefront of the industry. More relevant information means deeper insights and better investment decisions.
While the concept of alternative data itself is nothing new—investors have been using non-traditional data sources for a long time when making decisions—the availability and access to alternative data has never been as large and open as it is today. With the advent of “big data,” alternative data is easier to collect, share, purchase, and utilize.
How to Access Alternative Data
The largest reason for why alternative data is big news for the investment world is because of how the industry for accessing it is growing. In the past, alternative data served as a valuable addition to traditional data, but was difficult to access for investors and businesses. Today, that’s changing.
With people and businesses growing to be more connected online all the time, investors now have access to a variety of ways of purchasing and selling alternative data that can play an integral role in their investment strategy. WorldQuant, the international hedge fund and quantitative asset management firm, runs one of the larger data exchanges that’s been operating in the space since 2007. On the website, users can submit their own alternative data for review and curation that can be used by investors to provide better insight across various industries.
Conversely, there are newer names offering alternative data services as well. As the new alternative data boom makes its way to the financial markets, some innovators are combining it with another innovative market disruptor, blockchain technology. SciDex, a new blockchain-based startup, is building a decentralized protocol to support a marketspace for individuals and businesses to buy and sell their alternative data to others. By powering both sides of the market, SciDex is looking to expand the opportunity for others to benefit from alternative data whether they’re selling data or purchasing it. Other services in the alternative data industry offering alternative data trading include startups like Eagle Alpha, Windward and Dataminr, each with a specific domain proficiency.
The Bottom Line
What should be clear to investors and asset managers is that alternative data is likely here to stay. Not only is it more accessible and viable than ever before, but utilizing it means that investors can gain a better understand and more in-depth analysis of what they’re investigating. As more investment teams and managers take advantage of the growing trend and leveraging alternative data to complement the data they already have, those not willing to adapt will likely be left behind.