Big data adoption is fairly widespread, with 53% of companies using it in 2017. But it’s just the tip of the iceberg.
Now, an increasing number of businesses are recognizing the value of alternative data that may not have been on their radar a few years ago. In fact, total buy-side spend jumped from $232 million in 2016 to $1.08 billion in 2019, and it’s predicted to reach over $1.7 billion by 2020.
Companies that know how to properly harness alternative data can greatly improve their decision-making, and gain a significant competitive advantage.
What is alternative data?
“Alternative data draws from non-traditional data sources so that when you apply analytics to the data, they yield additional insights that complement the information you receive from traditional sources,” explains Krishna Nathan, CIO of S&P Global.
It can come in many different forms and can range from internet searches and social media posts, to public record information, consumer transaction data, and even satellite imagery. Although it may not seem overly significant when viewed on the micro-scale, alternative data can provide comprehensive insights when viewed at the macro level.
How alternative data is being used?
There are a nearly infinite number of applications, and companies across a myriad of industries can benefit. Here are three specific examples.
In June 2019, Verizon Media’s Yahoo Finance launched a subscription service for retail investor members that provides them with robust alternative data for a monthly price of $49.99.
“This new service gives investors a deeper look at the data and fundamentals essential to every day returns, paired with third-party research, enhanced charting with event analysis, and sophisticated company profiles to gain new insights and make smarter investments,” says Courtnee Coburn, Consumer Communications at Verizon Media.
It includes information on over 1,600 stocks and gives investors access to a wealth of data so they can identify innovation among companies, learn about hiring choices, spot supply chain dependencies, and more. In turn, this can provide highly-effective long-term valuation metrics, and marks the official point where alternative data becomes mainstream.
2. Hedge funds
Alternative data is also a gold mine for hedge funds. Seemingly-insignificant data on things like basic retail transactions is supplying these investors with lots of valuable information: they can see shopping habits, purchasing decisions, demographics and more. Satellites can also monitor parking lots to see how full they are to determine how popular a store is.
And it’s big business. As of April 2019, there were over 400 firms selling alternative data to hedge funds, and they’re expected to pull in $1 billion in profit by doing so.
One particular process that helps make sense of alternative data is web data integration, which aggregates and normalizes data for simple digestion. With that said, in the last 3 years, there has been a large influx in hedge fund managers and investment firms using alternative data in their decision tree models and algorithms. I expect that this trend will continue to rise.
3. Predicting geopolitical risk
This term applies to any risk that comes from governmental changes and can include spending, trade tariffs, currency valuation, taxes, and environmental regulations. Leveraging key alternative data can give decision-makers a heads-up to make more accurate predictions and better manage geopolitical risk.
A simple example is monitoring the movements of elite business leaders by following the path of their private jets. That’s what a stock research firm did when they notified clients that they spotted Occidental Petroleum Corporation’s Gulfstream V at the Omaha airport. This led to speculation that they were meeting with Warren Buffet’s Berkshire Hathaway Inc. seeking financial help. Shortly after the spotting, Buffet announced he invested $10 billion in the company.
As technology becomes more advanced with techniques like machine learning and natural language processing playing a bigger role, it’s becoming easier to analyze massive volumes of information and identify potential areas of concern.
Where is all of this heading?
As we mentioned earlier, big data adoption is nothing new, and a majority of companies currently utilize it in some form. However, alternative data has only really taken off in the past few years.
Given the rapid rate of adoption and the fact that nearly half of all investment managers are leveraging it, you could argue that alternative data will soon become widespread. Having a data advantage, even if it’s only minor, can make a huge difference in today’s hyper-competitive landscape, and helps leaders make well-informed decisions much more quickly.
While hedge funds were one of the first adopters of alternative data, it’s now used by countless industries. And with so many applications, we’re only beginning to see the power it can yield.
The present and future
Alternative data is interesting in the fact that it’s openly available, and in many cases free for the taking. However, when properly aggregated, it can provide powerful insights that simply weren’t possible in the past.
This is something that more and more businesses are realizing, and a growing number are jumping on board to take advantage. As alternative data becomes more mainstream through paid tools and subscriptions, it will likely be used by the masses in the very near future. And with processes like web data integration that offer intuitive visuals and reporting, it will only become easier to digest the information.