What is Alternative Data?

Alternative data refers to the vast array of non-traditional information used by investors, corporations, and analysts to evaluate companies or trends. This data is distinct from traditional sources like financial statements, SEC filings, management presentations, and press releases.

Unveiling the Data Landscape

Instead of relying solely on conventional sources, alternative data encompasses a wide range of unconventional datasets. These include social media posts, satellite imagery, web scraping data, credit card transactions, and sensor data from Internet of Things (IoT) devices. This type of data complements traditional sources by providing unique perspectives and uncovering hidden trends. For example, social media sentiment analysis can offer insights into consumer behavior and market trends, while satellite imagery can track supply chain disruptions and agricultural yields.

Sourcing the Unconventional: Origins of Alternative Data

The power of alternative data lies in its diverse origins, each offering a different lens on the financial landscape:

• Individuals: Social media activity, web traffic, app usage, and surveys provide valuable insights into consumer behavior and sentiment.
• Business Processes: Credit and debit card transactions, web data, public data from SEC filings, and email receipts offer structured data that can be analyzed for financial transactions and consumer spending patterns.
• Sensors: Geo-location data from IoT devices, satellite imagery, and weather data provide real-time or near-real-time information about various aspects of business operations and market conditions.

Categorizing the Data: Types of Alternative Data

To better understand the applications of alternative data, it's helpful to explore its various types:

1. App Usage Data: This data encompasses information on app engagement and reviews. It is particularly useful for understanding consumer behavior in specific industries like gaming, food delivery, and streaming services.
2. Credit/Debit Card Data: Transaction data generated from credit and debit cards offers high accuracy when the transaction panel is large and consistent. It is commonly used for retail revenue tracking.
3. Email/Consumer Receipts Data: This data, often collected from public resources, requires significant processing to become actionable. Examples include SEC filings, patent data, government contracts, and import/export data.
4. Satellite Data: Collected from satellites or drones, this data, while expensive and of variable quality, is useful for tracking supply chain disruptions, agricultural yields, construction activities, and oil & gas production/storage.
5. Social/Sentiment Data: This category includes data from social media platforms, analyzed to gauge public sentiment towards companies or industries.
6. Survey Data: Surveys provide a direct line to consumer feedback, offering insights into preferences and behaviors.
7. Weather Data: Weather conditions significantly impact business operations and consumer behavior. Weather data helps in understanding these impacts.
8. Web Data: Web scraping data, collected from websites, is used to analyze online trends and consumer behavior.

Beyond the Numbers: Use Cases for Alternative Data

The real value of alternative data is revealed in its diverse applications across various sectors:

1. Investment Research and Analysis: Alternative data is widely used in investment research to gain deeper insights into various industries and companies. By analyzing data points like social media sentiment, web scraping data, satellite imagery, and credit card transactions, investors can make more informed decisions about their investment strategies.
2. Credit Risk Assessment: Lenders utilize alternative data to assess credit risks by examining detailed transaction histories and consumer behavior patterns.
3. Supply Chain Analysis: Real-time insights into supply chains are possible using shipping data, satellite imagery, and other alternative data sources, helping to identify bottlenecks and disruptions.
4. Consumer Behavior Prediction: Companies can predict consumer behavior and tailor their marketing strategies accordingly by analyzing app usage data, social media activity, and transaction records.
5. Company Performance Evaluation: Alternative data sources can provide useful indicators of a company's growth and financial health even before financial statements are released, assisting in assessing brand sentiment and identifying growth trends.

The Rise of the Data Providers

The growing demand for alternative data has led to a surge in providers. The number has skyrocketed from a few dozen 30 years ago to over 400 active providers today. This rapid growth is fueled by the increasing availability of data from various sources and the need for more accurate and timely insights in the financial sector.

Conclusion: Embracing the Data Revolution

Alternative data is transforming decision-making across industries, offering unique insights that traditional data sources cannot. With its diverse range of sources and applications, alternative data is becoming indispensable for investors, corporations, and analysts seeking a competitive edge.