By Omri Orgad, Managing Director, Luminati Networks
Traders, investment firms and hedge funds looking to maximise their stock market returns have always been tasked with striking the right balance between risk and reward. In 2020, this balance has proved more elusive than ever given the record levels of volatility plaguing global equity markets.
The uncertainty generated by the spread of the coronavirus pandemic have sent stock markets around the world into a ‘bear market’. The UK FTSE 100 Index suffered its biggest single-day loss since 1987, with a sudden 10.9% fall, highlighting widespread pessimism and negative investor sentiment. Although many markets have rebounded, strategists at Goldman Sachs have predicted that volatility will remain elevated until the end of 2020. Therefore, to make the most profitable decisions on stocks, investors need a wealth of information to analyze and act upon. While traditional sources of data, such as market forecasts and earnings reports, remain important, they take time to pull together. As such, they can be based on outdated information.
This model of acting solely on long-established sources of information isn’t fit for purpose in today’s modern world. With data driving business and innovation, it’s no surprise that a rethink was needed regarding the data used to make investments. Therefore, a new form of data, called alternative (alt) data, is becoming the most important asset for decision makers. Alt data provides live data on factors that can impact the markets and can therefore hand investors a crucial advantage. It can include stock market financial data, satellite imagery to detect customer footfall, measurements of social media sentiment, changes in currency value, and many other external data sources that can build a more accurate picture for investors.
The concept of alt data isn’t a new one. That being said, the huge amount of information published online and the increasingly advanced data collection tools are pushing alt data to the next level. Collecting data in real time and at scale can seem like an overwhelming task, but it’s becoming an unavoidable part of staying competitive. Let’s look at one interesting example of unconventional external data sources being used to drive investor decisions: A hedge fund grew 30% by tracking the purchasing decisions of largely amateur investors on the app Robinhood. This app that lets users trade stocks free of traditional brokerage fees, and it is enjoying a spike in popularity during the pandemic. Having this data allowed the hedge fund to make informed decisions on equities based on live data that indicated their mainstream perception amongst amateur investors; the data also enabled the hedge fund to reap the outsized rewards.
For alt data to live up to its true potential, investors need to have access to the most recent relevant data. Automated data collectors are an indispensable part of making this a reality. Data collectors allow businesses to receive the latest insights from the sources that matter with the collection of publicly available data. A data collector will be able to gather real-time insights and feed them into the investment company, which can then analyse and act upon these insights.
Investing in stock markets has always been a process of carefully considered risk for those involved. Given today’s markets, some of the most volatile on record, this element of risk is not going anywhere. Risk has led investors throughout history to constantly search out the most powerful information and act on it. However, in the modern age, the sources of this information have fundamentally changed. The rapid move towards unconventional data sources has permanently shifted the game for investors. If used correctly, alt data has the potential to make investors’ decisions more informed than ever before, and may act as a panacea for current volatility.
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