Often in business, staying ahead means looking beyond the obvious.
Alternative data, derived from non-traditional sources, offers a depth and uniqueness that traditional data sources can lack.
In this blog, we’ll cover what alternative data is, how it differs from traditional data, who uses it, its role in business, and the pros and cons of integrating it into decision-making.
What Is Alternative Data?
Alternative data (or Alt data) refers to non-traditional data sources that provide unique insights and information not typically captured by conventional data sets. The depth, detail, variety and uniqueness of alternative data are what make it such a powerful form of intel.
Examples include:
- Social media sentiment analysis
- Geolocation data tracking foot traffic
- Credit card transaction volumes
- Satellite imagery
- Drone imagery
- Wearable tech data
- Web traffic data
- Mobile app usage statistics
- IoT sensor data
- Product reviews
- Weather data
- Flight data
- App usage
- ESG (environmental, social and corporate governance) data
- Market prices
- Company filings
- Jet tracking
Alternative data is far from a new concept. For centuries, astute business people have sought to understand their trading environments by observing the world through different lenses. These observations often generated insights—data that, while not traditional, provided a valuable edge in navigating markets effectively.
What has changed in recent years is the remarkable accessibility of alternative data, driven by technological advancements across industries. This progress has expanded the volume and variety of data, making it easier for businesses to derive insights and make more informed decisions.
Source: Casting the Net
What is the Difference Between Alternative and Traditional Data?
Traditional data comes from established, conventional sources like financial statements, government reports and structured databases. It is typically well-organised and standardised.
Alternative data comes from unconventional, non-traditional sources, it is often unstructured or semi-structured, and thus less readily accessible or usable, and not easily searchable.
It generally requires advanced processing techniques, substantial computational power and storage, as well as the ability to link seemingly unrelated pieces of information to develop a holistic understanding or derive meaningful insights.
Who Uses Alternative Data?
Alternative data is often used by hedge funds, private equity firms, investment banks and retail investors to gain insights and identify opportunities beyond traditional data sources.
It is commonly used to:
- Uncover potential risks not evident from traditional financial data
- Conduct stress tests and scenario analyses
- Identify and manage tail risks
- Discover new investment opportunities
- Reduce information asymmetry
- Optimise portfolio construction
Other industry specific examples include:
- Environmental, Social and Governance (ESG)
Alternative data like social media sentiment and news can be used to assess companies’ environmental, social, and governance (ESG) performance which can help investors incorporate ESG factors into decision-making. - Fintech
Alternative data can also be used by fintech firms to offer tailored financial advice, identify potential customers and develop innovative investment products accessible to retail investors.
Pros & Cons of Using Alternative Data
Pros
By using unconventional insights, businesses and investors can uncover opportunities and sharpen their strategies using alternative data. Here’s how it can help deliver an edge:
More Detailed and Accurate Analysis
Alt data provides additional data points of a business’s performance beyond traditional sources. When analysed holistically, it can potentially offer a more complete understanding of business performance and customer loyalty.
Decisions Backed by Historical Trends
The access to historical data enables predictive analysis, helping anticipate outcomes, identify opportunities and avoid potential risks.
Improved Investments and Partnerships
A broader range of data points allows businesses to assess compatibility with potential partners and make more strategic, mutually beneficial investment decisions.
Enhanced Customer Relationships
Data on customer feedback, web traffic and audience demographics helps businesses refine strategies to improve customer satisfaction and loyalty.
Competitive Advantage
Real-time insights allow quicker, informed decisions, helping businesses stay ahead of competitors reliant on traditional data.
Cons
While alternative data offers exciting possibilities, it’s not without its hurdles. Effectively leveraging these unconventional insights requires addressing some critical challenges. Here are the key drawbacks businesses might consider:
Inconsistent Data Quality
Due to the wide variety and the varied applications, alt data is hard to regulate. It can come aggregated or as a straight data feed. The lack of standardisation and rules around alt data means these types of data sets may contain errors, which can lead to misinterpretations which, in turn, affects decision-making.
Transparency and Ethical Concerns
Data collection methods, such as tracking GPS or online activity, may erode consumer trust if it is seen as invasive or unethical.
Privacy and Security Risks
Sensitive data usage exposes businesses to breaches, legal violations and potential harm to individuals. This can pose serious risks to a brand’s reputation and business compliance.
Discrimination and Bias Risks
Using personal demographics in decision-making can lead to unintentional discrimination, flawed data sets and long-term reputational damage.
Manipulated Data Variables
Publicly available data can sometimes be intentionally skewed to serve specific interests—businesses might highlight only positive reviews, while individuals may curate information to boost their credibility. This highlights the importance of adopting a comprehensive approach, drawing from a diverse range of data channels rather than relying on a single source.
The True Value of Alternative Data
Alternative or alt data offers deeper insights, empowering businesses and investors to make more informed decisions and gain a competitive edge.
As accessibility to alt data continues to grow, so do the opportunities to harness its potential in creative and transformative ways.
But challenges like data quality, transparency and privacy means that alt data requires careful management.
By adopting a thoughtful and ethical approach, progressive businesses can tap into alt data’s inherent value to inspire smarter investments, spark innovations and deliver groundbreaking solutions.