Make Smarter Investments By Leveraging Alternative Data

Hey there! If you‘re an investor looking to get an edge over the competition, you‘ll be excited to learn how alternative data can take your investing strategy to the next level.

Alternative data provides unique insights into companies and markets by analyzing information from non-traditional sources like the internet, sensors, and public records. While most investors rely on financial statements and earnings reports, alternative data allows you to spot trends and opportunities faster.

In this post, we‘ll explore different types of alternative data, look at real-world examples of using alt data in investing, and I‘ll share tips to help you get started. Let‘s dive in!

What Exactly is Alternative Data?

Alternative data refers to data derived from sources outside of traditional financial statements and disclosures. This includes information extracted from online activities, geospatial imagery, sensors, public records, and more.

While traditional data looks backwards at historical performance, alternative data provides forward-looking insights by capturing real-time activities. Here are some examples:

• Web data: Search trends, e-commerce transactions, website traffic, job postings
• Geo-location data: Satellite and aerial imagery, foot traffic measured via mobile devices
• Social data: Sentiment analysis of tweets, comments, reactions
• Supply chain data: Shipping container volumes, delivery truck GPS data
• Credit card data: Transaction amount and volume, spending patterns
• Other sensors: IoT networked devices, transportation trackers, weather

This real-world data exposes leading indicators, hidden correlations, and market sentiment to give investors an informational advantage.

The Surging Popularity of Alternative Data

The use of alternative data has absolutely exploded over the last 10 years. Consider:

• In 2022, an estimated 85% of hedge funds are expected to use alternative data, up from around 30% in 2011.
• In 2020, 38% of hedge funds said they expect alternative data to become widely adopted within 3-5 years.
• There are over 400 alternative data providers today, a 641% increase since 2000.

What‘s driving this surge in alternative data?

For one, the volume of potential data sources is exponentially larger thanks to digitalization across industries. From smart devices to satellites, data is being generated 24/7 worldwide.

Investors also recognize the power of real-time data for spotting trends and gaining an informational trading edge. While past performance doesn‘t guarantee future results, alt data provides unique clues for positioning portfolios.

Advancements in big data analytics and AI also enable efficiently mining alt data sets for insights that can complement traditional analytics.

Real World Examples of Alternative Data in Action

Here are some real world case studies of investors using alternative data to make better investment decisions:

Predicting Labor Costs with Job Posting Data

A hedge fund analyzed hiring trends and pay levels on sites like Glassdoor to gauge labor supply-demand dynamics. This allowed them to anticipate labor cost pressures in certain sectors, and get ahead of negative earnings surprises for companies with high human capital expenses.

Estimating Sales via Satellite Parking Lot Data

By counting the cars in retailers‘ parking lots using satellite imagery, investors estimated revenue and foot traffic ahead of earnings. Comparing year-over-year images revealed insights before traditional financial data was available.

Monitoring Home Improvement Spending with Credit Card Data

Looking at aggregate spending on home improvement supplies provided leading indicators for construction industry performance. When transactions for lumber or tools declined, it signaled a potential downturn for housing stocks.

Forecasting Product Demand via Social Media

Funds use sentiment analysis of tweets, comments, and posts about new products to gauge consumer enthusiasm and expected adoption. This helps predict sales trajectories even before products officially launch.

As you can see, leveraging alternative data opened up a valuable informational edge in each of these examples that traditional data alone couldn‘t provide.

Tips for Incorporating Alternative Data in Your Process

Here are some tips if you‘re looking to start using alternative data to level up your investing strategy:

• Combine alt data with traditional sources for the complete financial picture. Don‘t rely only on alt data.
• Identify relevant datasets that align with your focus areas for actionable insights.
• Conduct backtesting to determine the efficacy of signals before trading.
• Consider ethics around using personal/private data sources. Be responsible.
• Start small with low-cost datasets to pilot alternative data approaches.
• Use data science tools like Python or R to handle large data volumes.
• Work with alt data vendors to get clean data sets instead of wrangling raw data.

Evaluating and Selecting Alternative Data Vendors

With the surging interest in alternative data, there are now over 400 providers globally across various alt data categories:

When evaluating potential vendors, look for providers with:

• Proprietary data sources: Unique, non-replicable data feeds
• Timeliness: Frequent, low-latency data delivery
• Reliability & accuracy: Proven, consistent data quality
• Flexibility: Customizable delivery and pricing options
• Security: Robust data practices and protection

Reaching out for demos, free trials, and vetting providers is key to finding the right data partners tailored to your needs.

Advanced Methods for Extracting Alternative Data Signals

With alternative data, the volume of information can be overwhelming. Advanced techniques like machine learning and NLP allow investors to efficiently comb through noisy data for trading signals:

• Natural language processing to parse unstructured text data like social media, news, filings
• Computer vision for analysis of image and video data like satellite imagery
• Predictive modeling to identify patterns and anticipate future trends
• Anomaly detection to flag unusual events from expected patterns
• Sentiment analysis to systematically quantify qualitative opinions and emotions

Combining these techniques allows asset managers to generate insights from alt data sets that a human simply couldn‘t do manually.

Key Takeaways on Alternative Data

Alternative data opens up a world of valuable insights not captured by traditional data sources alone. By tapping into real-time, non-financial information, investors can gain a predictive edge to beat the market.

Here are the key points we covered:

• Alt data derives from non-traditional sources like the internet, sensors, satellites
• Provides forward-looking insights into trends and events faster than traditional data
• Surging popularity with 85% of hedge funds expected to use alternative data in 2022
• Must be combined with traditional data for the complete picture
• Advanced methods like ML/AI needed to extract signals from noisy alt data
• Ethical usage of personal/private data sources is crucial

The bottom line is that alternative data can provide a coveted informational advantage for investors – if harnessed properly. Used right alongside traditional data, it can help you spot opportunities faster than the competition.

Ready to level up your investing strategy with alternative data? Reach out – I‘d be happy to point you in the right direction to get started.