A recent trend in the investing world is alternative data. This term refers to sources of information about a company outside of usual filings, fundamental datasets, and earnings calls. Investors see this new information as key for gaining an edge over competitors.
Spending within the field of alternative data is already big and growing with each year. Total alternative data spending for 2019 was reported at $1.1 billion with a projected growth to $1.7 billion for 2020. Despite this large number, many market experts think alternative data is still in its infancy.
In its early days, alternative data consisted primarily of credit card transactions, geolocation data collected from cell phones, information scraped from the web, and even weather forecasts. These sources of data have raised eyebrows in terms of privacy.
However, the nature of alternative data has changed considerably over time. Much of the information is now gathered directly from consumers in a scientific manner that preserves privacy.
This sort of information provides a more comprehensive view of the motivations and intentions that drive consumers rather than looking purely at transactions. Alternative data has successfully helped predict sales down to the level of the specific retailer.
How Can Investors Access Alternative Data?
One of the leaders in the field of alternative data is Eagle Alpha, which maintains a platform that connects buyers and sellers of information. Last year, Eagle Alpha partnered with Prosper Insights & Analytics to provide an expanded dataset to clients. This dataset looks specifically at motivations, intentions, and behaviors of consumers and can provide unique guidance to investors.
Eagle Alpha currently has a taxonomy of 24 different types of data that can be exchanged through the platform. The types of data that most often get used through the platform include credit card data, consumer sentiment data, and data scraped from the web. According to Eagle Alpha, the majority of their clients are actually algorithmic traders who actually use the information to build computer models related to equities and other assets.
The primary motivation for incorporating alternative data into investing decisions is increasing alpha. The term alpha is used in the investment industry to refer to fund outperformance. For example, if a particular fund performs better than the S&P 500 by 4 percent, that 4 percent is referred to as alpha.
Alternative data is a new source of data that can improve decision-making processes and thus increase alpha. An easy way of understanding this is by looking at credit card data.
This information, for example, could track sales at one specific chain, which gives investors insight into quarterly performance without needing to wait for the end-of-quarter earnings report. Even a few weeks of early information is plenty of time to execute strategic trades.
What Advantage Does Qualitative Data Offer?
Of course, credit card data is quantitative. The true value of alternative data may be in qualitative data. This fact is the motivation behind Eagle Alpha’s use of Prosper Insights data. This information provides an overview of consumer spending behaviors.
However, the Prosper Insights database is massive. Few investors have the ability to work through such complex information and mine valuable insights. Eagle Alpha makes the database accessible through an intuitive dashboard that can be easily adopted into a workflow like more straightforward, quantitative data sets.
In this way, Eagle Alpha is democratizing the data. The company has also used the Prosper Insights information to create reports on Best Buy and Walgreens so that clients have a model of how to use the data effectively.
Eagle Alpha is consistently seeking out new forms of alternative data. For example, the popularity of the smartphone has made the collection of a wide variety of information possible, from the apps that people use to geolocation.
Of course, as mentioned above, this sort of information has some consumer privacy issues. For its part, Eagle Alpha only provides datasets that are completely free of personal identifiable information. Moving forward, it will be interesting to see how this sort of information is navigated and if any sort of regulation about the usage of this data is implemented.
Other sources of information are also becoming available each year with the creation of new technology. For example, the internet of things is a trove of alternative data that has not yet been adequately tapped.
Who Can Make Use of Alternative Data?
For the most part, investment managers are the primary consumers of alternative data, but other stakeholders are also starting to pay attention. Many private equity investors have started turning to alternative data when making investment decisions.
Even corporate employees have approached services like Eagle Alpha. Corporate employees usually refer to alternative data as external data. This sort of information can help in decision-making processes, as well as competitive intelligence.
Private equity firms can use alternative data to improve deal origination and post-acquisition management in addition to the more obvious due diligence applications.
