How to Turn Alternative Data into Alpha
We are surrounded by a seemingly endless stream of data. As technology advances, so does the range of sources from which we can gather information, and alternative data—picked from uncommon avenues—rises along with it. Mobile devices, satellites, websites, and the like provide troves of raw information that can be harnessed for use in data-driven decision making.
New alternative data streams offer a clear business value to those who can utilize them, providing insights that fall outside of what the norm can offer, but they are often unstructured with significant challenges to integration with existing models. To make full use of their potential and gain a competitive edge, many organizations are finally realizing that it’s critical to be able to aggregate and analyze alternative data before using it to make business and investment decisions.
Predicting Business Results with Alternative Data
The advent of machine learning and artificial intelligence makes data analysis fast, and with storage getting cheaper, focusing on the right kind of data is becoming a key concern.
Deploying traditional methods, hedge funds, private equity firms, and other investment units largely base their decisions on fundamentals such as sales data, earning reports, CFO stated estimates, sector data, among other publicly available sources. While these sources help inform the expected revenues of a company on a periodic basis, they lack real-time data to determine if there are any leading indicators that could affect business performance.
For example, if mobile data indicated that the daily footfall in stores of a particular brand were dropping while competitors’ foot traffic were increasing, investors would need to respond to that information and establish causation by integrating additional data streams such as transaction data, demographic information, and commuting and travel patterns.
Here are the footfall trends for some key brands during the Black Friday weekend this year. This data itself could be used to reset the baseline for Christmas store walk-ins and predict revenues.
Alternative data might provide the means to recognize and react to that proverbial shift in the winds. Beyond this, it also provides investors with useful secondary insights.
For example, investors can learn about a sale not just from an ecommerce platform but also from external sources such as the credit card companies that processed the transaction and the GPS unit in the truck that delivered the product.
The ability to track data like this across a large swath of the population in real-time grants a significant edge to investors who know how to react to this information — provided that it’s accurate and relevant.
Companies must also take the relevance, volume, integrity, and applicability of the data into consideration to yield useful results. Auditing new data sources for quality is a non-trivial task, and using clean data to make real-time decisions is a major challenge for investors.
The Edge of Alternative Data
According to a recent report from JP Morgan’s quantitative research group, “As more investors adopt alternative data sets, the market will start reacting faster and will increasingly anticipate traditional or ‘old’ data sources. … This gives an edge to quant managers and those willing to adopt and learn about new datasets and methods.”
Without emergent alternative data sources at your disposal, you run the risk of being outpaced by competitors who are taking advantage of these resources.
As TechTarget explains, alternative data can be used to improve decisions:
“In banking, for example, a lender may traditionally rely on an applicant’s credit score to assess risk and determine the probability that a loan will be paid back. When the applicant has no prior credit history, however, alternative data that illustrates the applicant’s history of meeting financial obligations, such as paying a cell phone bill on time each month, can be useful information.”
Additionally, data such as that found in the realm of social media can be used to cross-verify employment details, an employee’s marital status, and other information.
With alternative data at their disposal, investors gain an edge in their efforts to make profitable investments in new ventures. For example, investors can use location data to track how many customer walk-ins a business receives (predicting demand) and then decide if they need to consider other businesses for investment strategies. The need for real-time data is critical, as it enhances the speed and accuracy of key decisions and enables investors to detect any defects before making a choice.
Real-time alternative data is the newest financial data source for industry investors and hedge funds. The need to invest in the right platforms to manage data and provide real-time insights for timely investment decisions is here.
Andries is the General Manager of North America at Near. He has launched and currently leads the US business for Near, bringing the global Ambient Intelligence Platform to the Americas. Prior to Near, Andries held leadership positions at Outbrain, where he led the North America Enterprise Business Teams and adMarketplace, where he served as Chief Revenue Officer. Andries holds a degree in Finance from Wake Forest University, and is on the Board of Advisors for two Investor Research firms specializing in Technology and Marketing.