Alternative data refers to data used by investors to evaluate a company or investment that is not within their traditional data sources (financial statements, SEC filings, management presentations, press releases, etc.).
This non-traditional data source has received a notable amount of attention from the finance industry for its ability in improving investment management, increasing financial inclusion by assessing loan credit risk, and informing bond trading strategies. Many financial institutions and hedge funds have now recognized the power of alternative data to change the way they approach their businesses.
While the finance sector may have been one of the first to fully notice and act on the availability of alternative data, many businesses and organizations outside of the banking and investment field are keen on seizing its potential.
With data — and often publicly available web data — being such an influencer of enterprise decisions, many data-driven businesses are seeking their own alternative data sets for guidance.
What is Alternative Data?
Alternative data helps investors get more accurate, faster, or more granular insights and metrics into company performance than traditional data sources. Over the last 10 years, increases in computing power, I.T, and personal device usage has created massive growth in data generation. As a direct outcome, many companies emerged to collect, clean, analyse, interpret data, and provide it as a product that could inform investment decisions.
The alternative data space is growing quickly. According to a 2018 study by the trade group AlternativeData.org, investment firms spent $373 million acquiring data sets and hiring employees in the US to analyse them in 2017, which was a 60% increase from the year before. The group’s latest estimates peg the alternative data market driving over $1 billion in spending this year and growing to $1.7 billion next year.
Other estimates of the alternative data landscape are even higher. The research firm Opimas pegged the total spending on alternative data – including all the software, hardware, and personnel needed to mine it – at $4 billion, growing to $7 billion by the end of 2020.
Will Alternative Data go mainstream?
Alternative data is a secret weapon financial firms wish to keep on the down-low. After all, Wall Street is designed to reward those who find better ways of assessing risk and punish those who don’t.
Investment firms zealously protect their own data but are constantly seeking new sources of data that will give their quantitative analysts an edge in decision-making. After all, there’s a lot of structured market data that are freely available online; other data sets are available with a monthly subscription.
However, firms that want to truly differentiate themselves are now looking to alternative data for that added competitive advantage.
That competitive edge is a much-desired goal for sectors beyond investment firms. Retailers and travel companies can use alternative data to accelerate strategic decisions and grasp consumer demand per source market.
If 2020 is all about individual shopper customisation to satisfy the demand of a Me, Me, Me-driven society, retailers and business owners need to up their game. Getting their granular data right to nab the 3-second attention span of this generation is just the first step.
Suddenly the appeal of this non-traditional data source widens making the alternative new kid on the block uber cool. Mainstream, reaching the masses? Only time will tell.