Alternative data sets are non-price information that is published by sources outside of the company, that can provide unique, timely insights into investment opportunities. Hedge fund managers and other investment professionals within an investment company often use data sets of alternative data to obtain investment advantage against other market participants who use only traditional sources of data like prices and data from financial statements for fundamental analysis. Alternative data sets are often categorized as big data, which means that they may be very big and complex and often cannot be handled by software traditionally used for storing or handling data.
There are a lot of data-sets becoming available and alternative data offers rich insights that go beyond sales performance. There are many possibilities for new data sources, for example, stocks which are others managers’ “best ideas” (high-conviction positions, which are sometimes used in a strategy called “Alpha Cloning“), or data about the hedging needs for market participants, which also have forecasting value. Drone or satellite imagery data can be used to track the growing season of various agricultural crops. Sentiment data from social networks (twitter feeds, google search trend, etc.) can be used to estimate the relative popularity of various investments. Transactional data from the credit- or debit-card sales can be used to assess the strength of the current business cycle. Other sources include mobile phone activity, GPS tracking data, or information about the company’s patents. And we cannot forget to mention ESG investing (Environmental, Social and Governance) data which measure the societal impact of companies and that can be used to select the Socially Responsible investments.
In conclusion, alternative data is being used by fundamental and quantitative investors to create new sources of alpha. The field is still undeveloped but grows very fast. The process of obtaining benefits from alternative data can be extremely challenging. The systems, analytics, and technologies for processing such data are new, and most investors are not capable of integrating alternative data into their investment decision process. However, with the right strategy, a fund can mitigate costs while creating an enduring competitive advantage.