The rise of alternative data

July 16, 2021

Many business leaders believe that traditional practices can only deliver a certain level of results. This way of thinking has influenced financial and investment leaders to combine conventional data sources with other innovative practices. In the pursuit of delivering the highest results and gaining a market advantage in the finance industry, businesses are exploring new and obscure data sources that have actionable insights.

Alternative data refers to non-traditional data sources that finance and investment firms use to measure and guide their strategies. Examples of alternative data range from ESG information, credit card transaction to satellite imagery and weather data.
The number of alternative-data providers has grown to 20 times the size it was 30 years ago, with studies suggesting over 400 active providers on the market, compared to only 20 back in 1990.

Today, approximately half of all financial investment firms use alternative data and this number will likely continue growing as more businesses invest in new technology during and preceding the impacts of the pandemic. New data sources offer unique advantages and the opportunity to reveal new information that can differentiate a business from its competitors. Alternative data providers have increased considerably in recent years, but access to new data sources doesn’t necessarily mean an added advantage.

Comparing raw and aggregated data

Alternative data usually comes as aggregated data sets or as a straight data feed via APIs. Aggregated data is regarded as the more affordable option and is structured and easier to work with. However, these sets are more common, and because of that, they have less potential for alternative data structures. Alternative data specialists explain that this form often lacks depth, and businesses can lose the ability to explore their data in more unique ways.

The challenge today is how sure are we that a data set is creating value? It’s difficult to determine how much impact information is going to have until much later. Even with well-structured feeds and benchmarked data sets, the requirement for a skilled data analyst in the finance industry is only going to continue rising.

As discussed before, big data adoption is nothing new, and many businesses are currently utilising big data in some shape or form. However, alternative data has only really taken off in the last few years. Given the current level of adoption and the fact that over half of investment managers are now leveraging this form of data, some believe that alternative data could become more mainstream. Creating a data advantage, even it may be small can create a big difference in today’s competitive marketplace and support leaders with making quick and important decisions.

While hedge funds were one of the early adopters of alternative data, multiple industries now apply this form of data. Alternative data is openly available, and in many scenarios, it is free for all businesses. When executed and aggregated properly, alternative data creates powerful insights that were not possible in previous years.

The potential of alternative data is something more businesses are beginning to understand, and a growing number are taking advantage of this innovative data source. As it becomes more mainstream, it is likely to be adopted by more companies very soon.

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