Learn how alternative data can optimize financial decisions with our guide.
Table of Contents
Unlike data from traditional sources, like company filings or analyst reports, alternative data is a type of secondary data gathered from non-conventional sources, such as data digital activity and satellite records.
While traditional financial data serves a solid foundation, it often focuses on past performance and projections, leaving investors with a limited view of potential challenges or factors that are truly driving a company’s success. On the other hand, alternative data, when properly analyzed, offers a more dynamic understanding of current market conditions and possible disruptions, allowing stakeholders to gain an edge to outperform the market.
The potential of alternative data can be testified by its increasingly widespread adoption. Statistics published by Precedence Research has also revealed that the global market size of alternative data reached $4.0 billion in 2022 and its value is projected to increase at a compound annual growth rate (CAGR) of 52.6% from 2023 to 2032, signifying a fundamental shift in how stakeholders approach the financial decisions
Source: Precedence Research
Based on how they are generated, alternative data can be broadly categorized into 3 types, including alternative data from sensors, web activities of individuals, and business processes. The specific data generated by each source will be discussed below:
This encompasses data collected through physical devices that capture real-world information, including satellites, low-level drones, bluetooth beacons, surveillance cameras, and even WiFi signals. These sensors provide real-time, objective data on physical activity and environmental conditions such as:
This type of alternative data is collected through the online activity and opinions of individuals, which offer insights into consumer behavior, brand perception, and market trends. Examples within this category include:
This type of alternative data is generated during regular business transactions, allowing stakeholders to gain insights into actual business activities and consumer spending patterns. Examples of alternative data from business processes include:
Alternative data from business processes are more structured, allowing investors and stakeholders to leverage them with more ease. Additionally, data on credit/debit card transactions are currently considered one of the most popular, accurate, and highest-grossing data on the market, as seen in the research conducted by AlternativeData. This can further reflect the widespread use and practicality of alternative data from business processes.
Traditional data is often compiled on an annual or biannual basis. With the financial landscape constantly changing and the dynamic pace of data exchange on the internet, information from these annual/biannual reports could quickly become irrelevant and unuseful. Conversely, alternative data is generated daily or at a higher frequency. It can quickly offer more real-time information on various factors that influence companies and markets, allowing stakeholders to act in the moment to gain a competitive edge over those who solely rely on historical data.
The financial figures from traditional data can only offer a limited perspective on a company’s performance since it merely reveals information such as loss and overall revenue. Alternative data, with its diverse data points, can help stakeholders examine the context of the current situation. This can provide a more comprehensive view of a company’s health, customer base, and potential risks, allowing a more accurate analysis to let both investors and companies understand why a surge or decline has occurred.
The vast availability of alternative data sources presents challenges in ensuring data quality and consistency. Errors or biases within the data can give rise to misleading conclusions and undesirable effects to a company’s financial health.
Moreover, the use of alternative data, especially data collected from individuals, may raise concerns about transparency and privacy. If not dealt with properly, this could break the trust between stakeholders and consumers, or even lead to legal issues.
Companies must be clear about how they collect and utilize data, ensuring compliance with privacy regulations and building trust with consumers.
To avoid the issues mentioned above, it is crucial to assess the quality, source, and potential biases of alternative data before using it. Understanding any limitations or errors associated with the data helps mitigate risks and ensure sound decision-making.
Companies should also weigh the potential consequences and make sure the information is meant for public use, not something that is expected to be kept private, before sharing any alternative data with investors, third-party vendors, or other partners.
If a company does decide to collect and share these data, they must invest in robust security measures, such as establishing a cybersecurity infrastructure, to prevent information leaks and breaches. This is essential for protecting consumer data and maintaining trust.
Furthermore, building trust with consumers is important as well, which is why companies should be transparent about their data collection practices and ensure compliance with all relevant privacy regulations. This can establish a more sustainable approach to utilizing alternative data.
The applications of alternative data may differ for each investor and stakeholder, but there are several common ways it is used. We’ll discuss these applications and provide some examples below:
A report by McKinsey & Company found that companies that excel at customer experience personalization using data-driven insights can boost revenue by 40%, generating up to $1 trillion in value. With alternative data, investors and stakeholders can evaluate customer engagement, which can be a leading indicator of a company’s future performance. For instance, if a business dedicates resources to monitoring online activities, it can gain a deeper insight into consumer behavior through social media posts, online reviews, website traffic patterns, and mobile app usage data. This information comes directly from the target audience, so it can help them understand customer preferences and brand perception accurately. This will then allow them to quickly adjust their strategies and offerings for increased customer satisfaction and loyalty.
Analyzing alternative data can help forecast future demand for products or services, which is an important factor to consider for marketing strategies and investment decisions. For example, a surge in social media buzz surrounding a new product launch can signal strong market demand, while declining foot traffic at a competitor’s store might indicate a decline in market share. With this information, businesses can adjust inventory levels and investment strategies accordingly, leading to more efficient operations and reduced risk of financial loss.
Alternative data offers up-to-date information that can be incorporated into financial models, helping stakeholders understand a company’s current position within the market. For instance, if a company is considering to invest in a new production line for electric vehicles (EVs), reviewing historical financial data might only reveal past sales figures for traditional gasoline vehicles. By analyzing social media sentiment analysis, the company can gauge consumer interest in EVs, identifying the potential performance of the new product line. Satellite imagery of a competitor’s EV manufacturing facility can also help estimate the competitor’s production capacity and potential market share threat, all of which can be factored into the financial model of the new EV production line.
Alternative data, such as public contract information or geospatial data, allows stakeholders to look beyond financial figures to anticipate mergers and acquisitions, identify industry disruptors, and assess a company’s overall financial health. For example, credit/debit card transactions can reveal which location or season a product does particularly well in. This can help investors identify a potential partner’s target markets or complementary strengths, fostering strategic partnerships and collaborations that benefit all parties involved.
Due diligence is essential for uncovering any potential risks or liabilities associated with a financial deal as it ensures the overall viability of the transaction. Compared to company-provided information and public records, alternative data can offer a wider range of information at a greater volume, empowering stakeholders to make well-informed decisions. For instance, by analyzing web data focused on job postings, stakeholders can understand the positions the company is actively recruiting for and also gauge if the company is struggling to fill key positions. If they are having a hard time recruiting, it could indicate a weak employer brand or potential management issues within the organization, which will potentially affect the stability of a stakeholder’s investment.
By analyzing alternative data, stakeholders can identify a company’s competitive advantages and make timely investments that capitalize on these market opportunities. This is possible due to the dynamic and real-time aspects of alternative data. For example, negative online reactions to competitor campaigns allow the companies to identify under-served markets. With this information, the companies can then incorporate new features into their products to cater to the specific needs of these consumers. Data from patent filings can also help businesses find manufacturers that have the unique equipment to develop these particular products, letting them gain an upper hand in the industry.
According to a report by the Alternative Investment Management Association (AIMA), nearly 50% of investment firms currently leverage alternative data for their strategies. The growing amount of alternative data providers and alternative data usage in the reports by AlternativeData, MorganStanley Research, Forbes, and other analysts, further suggest that it will become even more widespread in the future.
Our expanding digital footprint is the major factor influencing the growth of alternative data. By 2025, the amount of data generated worldwide is expected to reach 463 exabytes, that is equivalent to 212.77 million DVDs per day! Smartphones, social media platforms, connected cars, and even wearable devices generate a continuous stream of data, which can all be analyzed to uncover insight that can help streamline marketing strategies and company operations. With this in mind, investors or other stakeholders who wish to stay ahead of the curve and make strategic decisions should not overlook the power of alternative data.
As we can see, alternative data empowers companies to make informed decisions for their business and investments. To get these valuable resources, companies can either compile publicly available data or request data sets from providers or specialist firms.
Stakeholders can search through government websites, industry reports, and news articles to acquire alternative data. There are also monitoring tools, such as Similarweb or SEMrush, that can help monitor online activity and generate relevant reports.
For a more comprehensive approach, companies can turn to data providers and specialist firms, as data providers possess the technology and expertise to collect raw data from a vast array of sources, including satellites, web scraping, and social media platforms. The raw data is often unstructured and requires significant processing to transform it into a usable format for analysis, so once collected, providers will organize and standardize it. This ensures consistency and accuracy across different data sets, allowing seamless integration and analysis for business decisions.
Poor quality or limited data can hinder a company’s analysis of its strategies. An ideal alternative data provider should offer a balance between data quantity and quality. Furthermore, companies should also consider the following factors to choose the right data provider:
TEJ stands out as a trusted alternative data provider. We prioritize data accuracy and relevance, leveraging our Watchdog database for up-to-date news and event scores to help you obtain the latest information on publicly listed companies in the Taiwanese stock market. This data is updated daily, allowing you to have a clear understanding of the current market situation. Furthermore, only a daily basis, TEJ’s ESG Event Radar Score (ERS) assesses the level of ESG event risk associated with a company, offering a comprehensive view of potential operational ESG risks or opportunities in your chosen field.
Other than that, TEJ’s commitment to providing excellent alternative data extends beyond our own platform. We have established a strong collaboration with Eagle Alpha, a leading platform for datasets and analytics, and currently provide alternative datasets on Eagle Alpha, ensuring that our high-quality data is accessible to a wider audience of investors and researchers. Learn more about TEJ Alternative Data solutions and elevate your investment strategy today!
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