Eight Things You Should Know About Alternative Data
The term “alternative data” is encountered more and more often when talking about business trends. Once a novelty, now it is becoming a necessity for high-quality business and financial analytics. But what exactly do we talk about when we talk about alternative data? The answer is many things. There is a lot to say about this major force in contemporary business but let us try to at least cover the tip of the iceberg.
Everything is connected
When we refer to something as an alternative, we usually mean it to be a new or different way of doing things as opposed to the traditional or mainstream manner. The traditional role of data analysis in business used to be rather limited. Financial analysts, investors, and managers would look at the data that came directly from the company or official sources and that would be it.
All that was destined to change with the developments of the internet, smartphones, and all kinds of sensors that keep us connected in the virtual realm. Such increased connectivity also led to the realization that everything is in a way connected. This means that knowledge about how a business is doing or what is the future of an industry does not have to come directly from the sources in the industry. If we know how to connect the dots, we will be able to tell a lot about the company not only from the information in the financial reports but from all kinds of data surrounding it.
That is what conditioned the rise and ultimate success of alternative data. If traditional data is what financial analysts have been using for a long time to evaluate a company, like financial reports and press releases, alternative data is everything else. This is the data that seemingly refers to something else, but ultimately, after analysis tells something of importance about the fiscal stance and future of a company.
8 things about alternative data
As there are very many types of data that is or could one day be considered alternative data in finance, there is also a lot to know about it. Of course, most of the knowledge comes with practice. For starters, we can comprise a shortlist of things to know about alternative data at the offset.
- Producers of alternative data are usually divided into three major categories: individuals, sensors, and business processes. Individuals produce data by expressing their views or showing interests online, for example by reviewing products. Sensors, like satellites or smart devices, create data by recording, taking pictures, or signaling their location and movement. And, of course, data is a by-product of most of the business operations, for example, hiring will produce data about the company’s growth or decline.
- Some types of alternative data are rather similar to the traditional data used in finance. For example, company funding data is not that different in kind from the commonly used financial information. And it is easy to see how such data is relevant for investors.
- But there such types of alternative data that may seem entirely unrelated to finance and investing. A good example is weather data. Weather and business are, of course, completely different things. Yet, weather conditions affect consumer behavior. Thus, reliable weather forecasts help to also forecast how the market is going to act.
- As the volumes and diversity of data we use has increased, many automated tools and algorithms have been created to help us deal with it. It is worth looking into various AI-based data-handling solutions to ensure efficiency.
- Additionally, with the bigger role of data in business greater importance is now given to data quality. Thus, we have many procedures from normalization to enrichment and so on, used for maintaining high data quality.
- 6) The more we develop the internet of things, the more alternative data will be produced as each interconnected item will be able to act as a sensor of sorts.
- 7) The main methods of getting alternative data are web scraping, raw data acquisition, and third-party licensing. Additionally, data as a service is now enabled by cloud computing technology, thus one can get the needed data on demand.
- 8) Traditional and alternative are relative terms, meaning that what is now considered traditional once came as an alternative to the methods used back then. Similarly, the data we now consider alternative, if it remains relevant through the changing conditions, will one day be traditional. The data that will be alternative then might be something we overlook today.
- One final thought
The reason we care about data so much is because success in business and investing depends highly on the ability to accurately predict the future. We look at today’s data to determine what is going to happen and act accordingly.
One thing we can forecast about the future from what we know today is that alternative data will certainly play a part in it.