Alternative data has become a much sought-after tool for investors seeking big returns, capturing alpha. But turning a mass of seemingly endless data into something useful can be difficult and costly. For those lucky enough to find this tool, using the data comes with a couple of challenges.
One of the challenges is in acquiring the information. Technology can provide new information and insight into a business that may seem lucrative, but that information may also be stale and questionable. That is why BlackRock’s Larry Fink, who says his firm uses alternative data, only uses data mined recently.
Acquiring the information, Challenge #1
We’re using technology to use information that has been created in the last three to five years,” he said in a recent interview, according to ValueWalk. Fink also pointed to their use of new methods of data collection, such as sensor technology.
“Alternative data is information that has not previously been used in the capital markets industry, but is nonetheless very, very valuable to investors,” says Carrie Shaw, the chief marketing officer of Toronto-based Quandl. “It always arises from sources well outside of what we traditionally think of as financial market data.”
And because alternative data is not found on a company’s balance sheets and income statements, the sources are limitless and sometimes costly. In today’s investment world, there is nothing special about a company’s bookkeeping any longer because they don’t give a totally complete and clear picture.
And this is the whole point of utilizing alternative data, which can include everything from satellite imagery to identify traffic patterns and economic activity, to cell phone geolocation data or even scanning emails to get a picture of consumer sentiments.
Another tool coming into use is artificial intelligence sensors capable of reading images and even facial expressions to gain insight. These new sources of alternative data could expand the market.
Challenge #2 -Securing the tools to analyze the data
Another challenge is securing the tools needed to analyze these often huge data sets and then take action on those findings. Shaw gives a good example of this challenge using the purchase of a book from Amazon. An investor could learn about the sale from Amazon, however, there are alternative sources for this kind of information.
Think about the credit card company that purchased the book, the GPS unit in the truck that delivered the book, and the security camera in the building where the book was delivered. They are all sources that knew about the transaction.
“So there are a lot of sources out there that can tell us about this particular purchase. This data is hard to access,” said Shaw. “But if you can get it, you can paint a bottom-up granular near real time view of an Amazon transaction… imagine doing this across millions of transactions. That is the promise of alternative data.”
Alternative data companies an important source of information
And this is where companies like Quandl, that deal expressly with acquiring alternative data, are filling the void. They employ teams of data scientists whose only job is to get out there and hunt for and evaluate the best offers from the data sector.
Shaw says, “You have to make your data. You have to harmonize your data. You have to make it available to API. Investors typically don’t want to consume pre-raw data, so you have to package it up as an index for the quantitatively-minded and level it up with some analytics for the qualitatively-minded.”
Arcadia Data is another company founded with the goal of connecting business users to Hadoop, an open-source software framework used for distributed storage and processing of data set of big data using the MapReduce programming model. Arcadia’s Converged Analytics Platform unifies visual exploration and back-end data analytics in one integrated enterprise platform that runs natively on a customer’s Hadoop cluster.
