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Is alternative data analytics the future of smarter investing?

Definitely. But first, let’s define what we mean by alternative data.

11 Mar 2021 – Blog

Alternative data is any data, typically unstructured, that comes to you from non-traditional sources. Traditional company data is structured data, which comes from sources such as annual reports or CRM systems. Alternative data might come from a satellite feed that shows real-time traffic patterns or parking volumes, social media sentiment analysis that identifies a trending product or person, or foot traffic that evaluates the strength of WiFi and Bluetooth signals. Stitched together, often using artificial intelligence, these new data sources can deliver unparalleled insight for organizations that invest in understanding the sources, techniques, and value of alternative data.

The truth is: alternative data is already being used by companies on the edge of technology, but few people know about it…so far. Those that do are beginning to see the immense value.

“Some companies are starting to collect data known as alternative, non-traditional or orthogonal,” says Krishna Nathan, CIO of S&P Global on CIO.com. “While it is still early days for this new kind of data, CIOs should start to become familiar with the technologies now. Soon enough, alternative data will be table stakes.”

Almost 10 years ago, Johan Bollen and Huina Mao, researchers at Indiana University-Bloomington, made a discovery that would substantially change the way we think of data analysis. While investigating how public mood affects economic indicators, they compared user sentiment derived from millions of tweets to the value of the Dow Jones Industrial Average (DJIA). Using machine learning and natural language processing technologies, they were able to predict daily changes of the stock market with an accuracy of 86.7%. This revolutionary insight ushered in the era of alternative data analytics, and yet a decade later, it is still underutilized and undervalued.

User sentiment derived from millions of social media tweets allow us to predict daily changes of the stock market.

But change is here. Alternative data is transforming industries and financial markets on an unprecedented scale. The hidden patterns uncovered through the use of alternative data are being used by companies in marketing, product development, supply chain optimization, and to guide investment decision making. According to a study performed by Deloitte Financial Services, hedge fund managers, private equity managers, and large corporations are currently using it to support alpha generation. More recently, economists have turned to alternative data in order to predict how the economy will fare in the aftermath of COVID-19 says Megan Greene in the Financial Times.

It is clear that leading organizations think alternative data holds the key to the future of investing. Alternative data is timely through its ability to give real-time updates, it is reliable through the objectivity and accuracy of machine learning algorithms, and it is cost-effective through the use of artificial intelligence rather than salaried employees. Alternativedata.org reports that the number of alternative data employees at funds has grown approximately 450% in the last 5 years and a Deloitte study notes that spending on alternative data in the financial market may exceed 7 Billion USD by 2020.

Growth among early adopters

This growth among early adopters is not surprising, especially when being last in the financial sector can prove ruinous. According to a Deloitte study, risks include:

  • The lack of alternative data and accurate insights affects efficiency in the market and disrupt positioning of value creation for clients

  • The longer firms wait to adopt relevant alternative data strategies, the harder it will be to join the movement later on

  • Once competitors gain an edge and outmaneuvers late adopters and laggards, capital flight due to ruined reputations will follow suit

Embracing alternative data and integrating the capability to use it effectively should be at the forefront of data analysis for investors and innovators in a technology-driven world.

Alternative data is here. And it is here to stay. It is imperative that investors stay one step ahead, especially in the volatile market expected to come in these next few years.

Will you stay ahead or be left behind?

Authors:

Dr. Qingqing Han, Co-Founder, Wissee

Dr. Huina Mao, Founder, Wissee

*With thanks to Chay Anderson and Alya Fadil for their contributions