Connect with us

TECHNOLOGY

The Quest for Alpha in Alternative Data

The Quest for Alpha in Alternative Data 41

By Gediminas Rickevičius, Director of Strategic Partnerships at Oxylabs.io

The last few months have seen an irrational rise of the stock market amid lockdown-induced economic catastrophe. With very few exceptions, forced border and business closures have caused economic declines all over the world. These include a US downturn three times worse than the 2008 financial crisis and double-digit GDP declines in the EU

In the meantime, NASDAQ and the London Stock Exchange have seen stock prices and indices continue to climb. They not only experienced growth but there was also barely any stagnation during the downturn.

Clearly, the markets don’t seem to care about what’s happening to the economy. While analysts all over the world speculate on many reasons for why this is taking place, it may be safe to say that non-market factors like quantitative easing and increased speculation are among many of the reasons for irrational growth in the markets.

An irrational market is tough to beat using traditional financial analysis

An irrational market divorced from the actual economy is difficult to understand. It’s even more difficult to beat. That’s why investors are looking for insights that go further than traditional market indicators.

Alternative data can empower investors with an edge that helps them generate above-average market returns. And it’s not a new idea either – market participants such as investment banks and hedge funds have been approaching alpha generation through an alternative data and analytics-based approach for years.

Alternative data goes above and beyond traditional market data

Alternative data is economic, financial and political information that is found outside traditional sources such as social media networks, public websites and applications. 

Specific sources include raw scraped data, data sets and third-party services providing unique data types that can include:

  • Retail inventory data
  • Hotel/commercial flight bookings
  • Mortgage data
  • IoT data
  • Geolocation & satellite images
  • Entertainment event listings
  • Politician trading activity
  • Government contracts
  • Product recalls
  • Twitter activity
  • Reddit forums (like WallStreetBets)
  • CEO compensation
  • Work visas
  • Corporate flights

Alternative data is challenging to collect, making it expensive to purchase. That’s precisely why it gives savvy investors an edge. To put it plainly, alternative data provides unique insights that helps professional investors outsmart day traders, passive investors and algorithms. 

That’s because market information simply doesn’t hold the weight it once did. The Efficient Market Hypothesis theory asserts that all public information is almost immediately incorporated into financial asset prices, making attempts to outperform the market futile in the long term. Whether traders agree on the theory or not, what seems evident is that data diminishes in value with age. The fresher the data, the more relevant the insights. Alternative data is not only current, it’s mostly hidden – and that’s a powerful combination.

How Alt Data Can Predict Company Performance

Investing today is less based on intuition and more on mechanics. It’s no longer really about “investing” in a promising business. Advanced financial analysis instead uses analytics and scenario modeling to find hidden correlations that predict market movements.

Two examples of alternative data could include hirings of high-level executives (signaling a change in the approach to business) and changes in customer sentiment (signaling a change in the perception of a brand). Such company related data reveals behavioral patterns that can serve as predictive indicators of public company performance.

Public company payments to suppliers

Insights can be derived from the activities of public companies servicing large global corporations. One example is supplier payment history (derived from credit inquiries) that can reveal insights into the health of a company’s business. 

This can work two ways. A positive scenario can be discovering inquiries by potential trading partners looking to establish a relationship with a growing business. Conversely, increased credit inquiries may be a sign that the company has issues paying its bills. Either case can provide share price direction when combined with other data sets. 

Private company data

Private company information is critical to investors looking for long-term insights into public markets. Among companies with 500 or more employees, the number of privately held businesses has been continually increasing. Accordingly, of about 32.5 million US businesses in 2020, less than 0.01% were publicly owned. Since most companies are privately held, their data is especially valuable in predicting the overall market’s direction.

This is accomplished through the creation of benchmarks or indexes using underlying private company data sets. It can be argued that smaller privately-owned businesses feel economic changes earlier and more strongly than their large public counterparts. All these factors indicate strengthening or weakening economic conditions. When combined with advanced analytics, these data sets can predict market or sector moves for public companies. 

How to Find Alternative Data

Alternative data can be purchased from companies that extract data from websites through a process called web scraping. Web scraping uses “bots” that crawl and extract data from public websites and publicly available social media forums. 

Some companies choose to extract the data with in-house scraping solutions or through outsourced ready-to-use tools. Since alternative data is specialized, the sources must be equally unique. That’s why leading investment firms typically scrape data according to their own customized strategy. 

Web scraping is the primary way to access insight-generating real-time publicly available data from the web. Due to the widespread use of the internet, tremendous amounts of valuable data are available on the web. Information related to business intelligence, customer behaviors and actions, news sentiment, and much more is within arm’s reach. To learn more about web scraping and how it can help you find valuable information, join Oxycon – a two day online event in August, dedicated to the newest trends, tips and tricks in data collection.

Alternative Data Requires Advanced Analysis 

Unlike other public data types, alternative data needs creative analytical skills to obtain insights into what market signals are at play. Data like housing permits, hiring activity, or corporate flights to a specific location may give insights into a corporation’s activity, but that data may not be as straightforward as other information such as increased sales, successful drug trials, or technological innovation.

It can even be argued that alternative data can produce indicators that predict more obvious traditional market signals, like early supply chain issues that may affect prices that then affect sales. To produce those insights typically requires extensive industry experience and inside knowledge into the factors that can move asset prices.

Wrapping Up

Beating the market has never been more difficult for the professional investor, especially with the proliferation of algorithmic trading and passive investing.  Alternative data has emerged as a necessary part of the investment analysis process by providing insights not commonly found or understood by the average investor or algorithmic trader. 

Whether you choose to buy your own data sets or scrape it yourself depends on factors like time, resources and expertise. Whatever your choice, the insights you obtain are arguably more important than the money spent. Also important is how fast you take action – especially in an environment where news travels at lightning speed and the value of data rapidly degrades with time. 

 

This is a Sponsored Feature

Continue Reading
Editorial & Advertiser disclosure

Recommended