How to Harness the Power of Alternative Data

For many years, traditional data has managed to stay relevant in the financial sector. However, as new technologies arise along with the consequent increase in data usage in businesses, traditional data sources slowly lose their relevance. Now, alternative data is being combined with traditional data sources to help companies improve their investment decisions. Let’s look into why alternative data is becoming popular in financial spaces and how businesses are harnessing its power to help their decision making processes.

Beyond traditional data

Traditionally data relevant for investment is acquired from press releases, financial statements and similar communications from companies. Alternative data can be gathered from many different sources, that help predict how the market will soon behave, thus providing business opportunities. These sources include but are nowhere near limited to activity in social media, credit card transactions or even satellite imagery.

The important thing to remember is that alternative data is not meant to replace traditional data. It is an additional tool, that combined with usual finance data, allows to have a deeper insight into potential investment opportunities. But how exactly do you use the alternative data for such added value?

The power of alternative data in action

Let’s look at some examples of how alternative data has been used to considerable success.

1. Social media.

Knowing the news just a couple of minutes ahead of the mainstream media may provide a decisive advantage. Today that is possible with the popularity of social networks. Whenever something happens, it may be instantaneously reported online, way before major media outlets get any chance of running the story. Investors that are alerted about such reports have a chance to react before the market does.

2. Satellite imagery.

Sometimes deep insight comes from looking from very far away. Satellites orbiting the Earth are able to take images of parking lots to see how full they are at business hours. For those who have access to this information, it means knowing how busy the business is when it is supposed to be busy. This helps not only in deciding which Western companies have potential, but also allows to take a peek into such markets as China, where official sources of data might not always meet the desired level of credibility.

3. Digital tracking of business operations.

The example of Tom Farms LLC shows that alternative data not only helps to find investment opportunities in other companies, but also allows to better understand how to invest in your own. Data from daily operations assists in controlling these operations better and provides insights into what needs to be changed for optimization.

4. Weather.

Why would the big blue whale of the computer technology industry be interested in buying a weather forecasting company? When IBM announced their plans of doing just that, that is buying The Weather Company back in 2015. Now we know that by tracking even minor changes in weather and having the tools to process this data, IBM’s Deep Thunder service is able to predict customer behavior. Simply put, if and what we buy partly depends on what is the weather outside. Knowing this gives an advantage both to retailers and to potential investors.

5. Contagion.

A particularly relevant example of alternative data use in 2020 is the data on spreading patterns of a disease. The effect that COVID-19 had on all our lives is hard to overstate. One of the most affected areas is consumer behavior. Thus tracking the spread of the disease and other data connected with COVID-19 has considerable power to predict the near future of the stock markets.

Outside of the box and into the future

These are just a few examples of how alternative data sources enable companies and investors to take well-informed actions. It is plain to see that harnessing the power of alternative data means thinking outside of the box and looking for signs in most unusual places. But looking into unusual places is steadily becoming a usual procedure.

It happens from time to time that what once could have been thought as a novelty with potential soon becomes a standard necessity. This is predicted to be the case with alternative data in finances. Which means that learning to harness the power of alternative data is the only way to have a future in investment.

Data is everywhere

One final remark to address the fact that some of the alternative data sources at the moment are out of reach for most of us. Not everyone has access to relevant satellite imagery or means to digitally track every daily procedure. However, just because not all data is accessible, that does not mean there are no sources that could be used to gain an advantage. Data is everywhere – every step anyone takes and everything that happens is information of sorts. The key to success is looking into it.