• Gediminas Rickevičius, Vice President of Global Partnerships at Oxylabs.io


• 07.03.2023 09:30 am
#data #investment

Investment information moves fast on the internet, and it can quickly go stale. That’s why the demand for financial data outside mainstream sources - referred to as “alternative data” - is projected to reach $8.98 billion by 2025 at a CAGR of 39 percent.

Alternative data provides a competitive advantage over easily-accessed sources such as government reports, company financial statements, and mainstream business news. Besides being less accessible than traditional sources, alternative data is more relevant and specialized, giving portfolio managers an edge that helps them generate above-average returns in a volatile and unpredictable market. 

Alternative data brings clarity to volatile investment markets

Investing used to be more straightforward in the past. Typically, traders and fund managers would analyze financial statements and economic reports for insights that helped them choose investments based on real-world conditions. 

Today’s investment landscape is vastly more complex. Institutional algorithmic trading, “robo-advisors” (algorithm-driven investment platforms), currency fluctuations, and low-interest rates are flooding the market with capital and causing instability. As a result, actual economic indicators like job growth and inflation - while still relevant - have less of an effect on stock prices today when compared to the past.

Alternative data serves as an antidote to the current market chaos. By delivering insights on actual market trends, alternative data provides an inside view that helps investment professionals predict market movements with greater precision. Other benefits include:

Alternative data applications save time 

Alternative data leverages the power of technology to sift through massive quantities of data from websites, mainstream news, and social media networks. Besides saving time, this type of analysis gives investors a more comprehensive view of the financial market due to numerous sources that span multiple industries and sectors. 

Alternative data provides diverse insights 

Sources of alternative data span locations across the world, giving analysts different viewpoints previously unavailable from traditional domestic sources of financial information. Besides expanding an investor’s overall view of the market, alternative data can inspire new investment ideas based on information from different industries and locations. 

Alternative data provides timely insights that beat corporate financial statements

Traditional data such as company statements and government reports typically provide monthly, quarterly, and yearly breakdowns on financial performance. Alternative data is superior from a timing standpoint by giving investors information in real time for more accurate and relevant insights that can affect current stock prices.

Types of Alternative Data

Alternative data is extracted from numerous sources, including mobile applications, satellites, social media networks, and web traffic. Some commonly used types of alternative data include:

• Website traffic

• Mobile applications

• Online surveys

• Credit/debit card transaction data

• Geo-location sensors

• Satellites

• Online comments and reviews

• SEC filings

• Patent data

• Government contract data

• Low-level drones

• Sell-side retail investment data 

• Web scraping data from public sites: e-commerce stores, online marketplaces, online directories

Not all alternative data is equal

In terms of accuracy and relevance, the quality of alternative data varies substantially according to its source. For example, images of oil tanker capacity obtained from satellites and drones may result in a different conclusion about oil prices when compared to data scraped from mainstream articles and social media forums discussing the subject. 

Alternative data also varies significantly in terms of cost. For example, verified data from a credit card company is typically more expensive. As a result, the relevance, accuracy, and timely nature of data often correlates directly to its cost.

Using alternative data has some risks

Using alternative data can pose increased risks that can be both technical and analytical. Such risks include: 

• Timing errors due to data extraction delays 

• Incorrectly incorporating data into a model

• Model wrongly linked to the trading process

• Inaccurate analysis and errors in deriving trading signals

While there isn’t a single way to mitigate the risks, it is essential to implement standard testing procedures that ensure correct data processing. Additionally, many errors can be mitigated by using a fluid data architecture to handle multiple data feeds with ample processing power to accommodate rising demand over time. 

How to Obtain Alternative Data

Publicly available alternative data can be obtained by extracting it from the internet using a process called web scraping, or by purchasing data sets from a third-party agency or supplier.

While buying data sets may be easier, some investment firms scrape their own data with an in-house team, while others use ready-to-use tools from a third-party agency.

In-house web scraping requires a team of developers to create and configure scripts (also called robots) that crawl and extract data from specific website targets. Used mostly by larger companies, in-house web scraping typically offers benefits that include customization, flexibility, and the ability to troubleshoot errors during the process. 

Outsourced web scraping is a cost-effective strategy typically favored by smaller firms that leverage ready-to-use solutions to extract public data from the web. Besides reducing costs, outsourced web scraping enables firms to divert resources to analysis instead of focusing on the complexities of the extraction process. 

Curious about how investment firms are using alternative data? 

Alternative data is here to stay, and investment firms are using it in greater numbers to remain competitive. To learn more about how professional investors use alternative data, download our white paper “Alternative Data Brings Opportunities to The Financial Sector”. You’ll find out how alternative data is being used in the financial sector, why over 60% of surveyed companies use alternative data, how popular are third-party database integrations, and much more.