We've spent more than 100 hours immersing ourselves in the alternative data market. Here's a short summary of how top financial institutions make money using alternative data

We've spent more than 100 hours immersing ourselves in the alternative data market. Here's a short summary of how top financial institutions make money using alternative data

Let's first understand the terms. The traditional data that traders use is the company's financial statements, various financial historical data, etc. Alternative data is everything that's indirectly related to a company but is not a direct indicator of its financial values and performance. This concept includes the widest range of metrics - for example, the number of company employees, the number of followers on social networks, website traffic, number of discount products, geolocation data, supply chain data, etc.

All these indicators don’t directly correlate with the company's value on the stock exchange. However, these are all useful signals (some of the earliest of the entire spectrum of information about the company), which can be used to determine the company's dynamics in plus or minus.

There’s a wide range of alternative data sources:

  1. What is collected using web scraping tools - website traffic, subscribers in social networks, the number of discount products, data on the location of stores - all the company's activity on the Internet;
  2. What is generated with the help of sensors - images of warehouses from satellites, weather data for logistics, geolocation data;
  3. What the business generates by itself - bank records, tax data, corporate documentation.

Top hedge funds have spent about $1.7 billion buying alternative data in 2020.

For comparison, $0.25 billion was spent on alternative data in 2016. According to alternativedata.org, this market is growing +50% every year, and COVID-19 has only increased its growth.

The average price for a dataset with alternative data is in the range from $10K to $20K, which makes the entry threshold incredibly high for average traders.

Now alternative data is the prerogative of top funds, which can afford to spend several million a year experimenting with data.

However, the situation has already begun to change: less expensive tools are emerging (such as thinknum) that allow access to data at a significantly lower price, but these tools are still more funds-oriented than for single traders.

Now we can state unequivocally that there is a tendency towards the democratization of alternative data and a reduction in its cost.

A few examples of how the investors use alternative data

One of the funds began tracking corporate jets of portfolio companies to predict M&A deals. For example, Cisco executives have flown several times to Carlsbad, California, where Luxora is headquartered. A few months later, Cisco acquired Luxora. The jettrack.io service also works based on this.

The second example is more urgent. We all know how COVID-19 has impacted financial markets. Hedge funds have adapted to the situation and started tracking metrics related to the pandemic to understand the recovery level in the markets. Metrics such as morbidity and mortality in many countries help to predict the possibility of a lockdown and the further consequences for local markets.

The above examples are massive datasets that require many human and technical resources for analysis, that's why they are in demand by whales and practically out of use by average traders.

However, let me reaffirm, it seems to me that there are tendencies towards the democratization of alternative data. There are a number of simple signals that will help you understand the dynamics of a company before official announcements and financial statements. Some examples of such signals: “website's traffic has dropped 28% over the past month”, “DoorDash added 640 new restaurants to its chain within the last week” etc. These are all simple examples that show how alternative data can be useful to everyone, not just the huge players of the financial markets.

We'd be grateful for your feedback and opinion on alternative data. Do you see the potential in using them, or do you consider it a waste of time?

P.S We've recently launched a real-time notification service with signals about the behavior of companies all over the Internet. For those who are interested - welcome, let's investigate this opportunity together.

[Some useful links]:

[Some enterprise alternative data providers]:

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