The transformation of the investment and finance industry by alternative data

Gunja Gargeshwari, Chief Revenue Officer (CRO) Bright Data

The alternative data market is growing exponentially at a compound annual growth rate of 52% and was valued at $4.5 billion last year. The main reason for this impressive growth is the benefits it offers financial investors in the decision-making process.

Alternative data is frequently used by investors to reach a deeper necessary view of the market, anticipate movements in the market, monitor inflation, make earnings projections as well as identify possible emerging opportunities, etc. This also translates into a plethora of data to power Artificial Intelligence (AI) tools and uncover potential trends and patterns, providing numerous chances to gain a competitive edge. As a result, investment companies are on the lookout for new data sources and data professionals that can support their full data management cycle needs.

What is alternative data?

Alternative data refers to information obtained from non-traditional sources that investment professionals can use to supplement their conventional information sources. This may include security and exchange commission (SEC) filings, financial records, press releases, company reviews and media reports. Alternative data is mostly generated from publicly available web sources such as social media engagement, professional activities, and online searches. With every public comment or review, individuals generate unstructured alternative data, which can reveal patterns of behaviour. This type of public data can provide important insights for businesses during the ‘alfa- seeking’ decision-making process.

Alternative data also comes from businesses that tend to produce structured data. This kind of data can yield more profound insights when making impactful financial decisions. Such data encompasses transactional data, which is created as a result of purchases and similar activities. Additionally, data obtained from government agencies, taxes, and other similar sources fall under this category.

There are two main sources of data: traditional data (e.g., financial reports, trading reports, SEC filings, and news) and alternative data (e.g., public geolocation, satellite, payments, and social media). Alternative sources of information may include news sentiment, expert networks, or any publicly available web data.

Why is alternative data in such high demand in the finance industry?

Successful investment management firms rely heavily on a variety of data sources to identify patterns and gain insights into investment products. Hedge funds were among the pioneers in leveraging data analytics technologies and big data, with private equity managers quickly following suit. These early adopters are also leading the way in terms of alternative data.

The growing popularity of alternative data is primarily due to the significant competitive advantage it provides businesses. For example, it can track publicly available datasets over time to monitor prices and inflation. It can also use public social media postings and search engine data to predict earnings and forecast market-impacting events.

Alternative data is also utilised in model-driven investing, which involves analytical data models to uncover insights for the financial industry, with a specific focus on investment. While most firms still rely on traditional data sources, alternative data is gaining importance for investment firms looking for innovative ideas to increase return on investment.

Furthermore, the vast amount of data available presents a significant opportunity for businesses to gain a competitive edge. The amount of global data generated is projected to reach 163ZB by 2025, providing ample data to fuel AI tools, uncover potential patterns and trends, and increase the likelihood of gaining an advantage over competitors.

To capitalise on this opportunity, investment firms are prioritising the expansion of their overall data operation and, with that, their external data sources.

Alternative data in the real world

Over the next few years, the investment landscape is expected to undergo great change through the integration of alternative data into the investment decision-making process for hedge funds and investment firms. By combining the collection of external/alternative data sources with data management and analytics tools, these firms can explore new investment opportunities, evaluate existing investments, and manage their portfolios more efficiently. As companies recognise the value of alternative data, we are starting to see widespread adoption of alternative data prediction models, and alt-data-driven revenue streams – rapidly transforming the investment and finance industry forever.

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