How is Alternative Data Used?
With the growth in the types of data available from websites and apps, the use cases of alternative data are expanding.
Stock Price Predictions
Data can be gathered from various sources to predict stock price movements. This can include data from public discussion forums, foot traffic in stores, earnings call transcripts, analysts’ forecasts, and more. Similarly, inquiries to credit agencies can reveal supplier payment history, which can provide clues about the financial stability of a company.
Web scraping can be used to track the prices of millions of products online to measure inflation levels. Inflation impacts asset price movements, as well as the direction of monetary policies of central banks. Tracking inflation could be crucial for risk management.
Commodity Price Predictions
Satellite imagery has been used to track the movement of oil tankers and ships carrying essential raw materials for industries like iron ore, copper, and natural gas. These can be used to predict supply and demand gaps, and the future price of commodities.
Downloaded apps can reveal the location data of people. This can be used to evaluate foot traffic in particular areas, which is an indication of possible changes in real estate prices.
Data helps investors stay ahead of the curve on key investment factors like:
- Making sense of economic data that impacts forex movements.
- Augmenting fundamental analysis with sentiment data to monitor changes in the market over time.
- Identifying risks in specific sectors through high-frequency news flows.
- Analysis of behavioural flows in the market.
Driving an Edge in ESG Investments
Machine learning is a huge advantage when it comes to ESG assessment. Companies release ESG disclosures frequently on social media, news channels, blogs, forums, and other platforms. These sources reveal events experienced by a company related to environmental and social responsibility, such as shortage of water, deforestation efforts, and racial discrimination. Machine learning models can apply ESG taxonomy (based on ESG standards) to assess companies consistently. It helps managers raise ESG levels in their clients’ portfolios and also focus on risk-adjusted performance.
Alternative data is changing the face of finance and the capital markets. Investment managers who fail to follow this trend and update their processes face strategic risks. They can be outmaneuvered by competitors.