What alternative data can do for corporate alpha

Learn how predicting quarterly earnings using the likes of Environmental, Social and Corporate Governance (ESG) data can be a lucrative endeavor for Private Equity (PE) firms as well as other financial institutions. 

In this article we will take a look at:

What advantage does alt data hold for investors? 

Alt data offers investors, fund managers, hedge funds and private equity firms quite a few advantages:

  • Real-time insights regarding consumer behavior 
  • Accurate information regarding corporate performance ahead of quarterly earning reports and declarations
  • Insights into legislation which may have an important impact on traded entities 
  • Getting a quick, and accurate picture of news reports which can be acted on immediately 
  • Collecting social media data to discern public sentiment, gauging fear or excitement which may be indicative of market movement
  • Analyzing blogs and tweets from important business leaders and politicians which when analyzed can provide quantifiable metrics 

Alt data promises and delivers on offering the financial industry a way to make smarter, fact-based decisions and trades based on a host of data sets. These can be weaved together with classic data to create sophisticated trading models which trigger buy/sell orders based on social, news, and consumer-based signals. 

Which alt data sets are investors looking at? 

Within the investing community, and according to a recent Greenwich Associates report, one can clearly see the following data points in the highest demand:

  • Crowdsourced data which can be indicative of many factors such as energy consumption, commercial rental prices, and shopping trends 
  • Credit card and internet service transaction data (such as PayPal and Square) which can help identify specific buying trends as well as identifying highs and lows in consumer discretionary spending 
  • Point of Sale (PoS) systems can help investors determine which payment processing system consumers prefer which will indicate profitability in transactional fees (Visa or Mastercard Vs. Venmo, for example)
  • Business insights such as ‘footfall data’ (i.e. the number of people entering a store or shopping area in a given time) 
  • Satellite data which can help determine things such as mall parking lot occupancy levels, or things such as disruptions in factories or distribution lines
  • Geospatial data can be used to identify health crises and pandemic outbreaks as well as natural disasters such as hurricanes which may affect insurance prices and the local construction industry, for example. 
  • Environmental, Social and Corporate Governance (ESG) which are considered to be the 3 pillars by which one can measure an investment’s future economic performance (return vs. risk)

Analyzing companies using alternative data sets 

As we have seen, alt data can have many use cases in the context of investing in capital markets. 

But how can one analyze a company’s potential future performance? 

Besides financial fundamentals, there are many additional aspects which can influence market valuation of a corporate entity on markets. That is why investors are collecting alternative data sets pertaining to specific companies such as:

  • News, this is not a single news item but rather a collection of a large quantity of interrelating updates that when cross-referenced can help investors identify clear correlations and trends. For example, a company may announce increased quarterly earnings but then be hit with a lawsuit that is underplayed in the news. Having this information can help you decide whether the company’s current valuation took all of these into account, and make decisions accordingly. 
  • Social media, for example positive or negative sentiment about a new service or product. For example a new tv show gaining positive buzz may indicate increased signups for that service which will translate into higher than expected earnings and stock prices may follow suit.  
  • Predicting quarterly earnings, is one of the most common ways investors attempt to preempt the market in order to increase their alpha. In this instance investors are primarily looking at transactional data, footfall data, web traffic, app data, and receipts. An investor who identified an uptick in the use of Zoom Video Communications (NASDAQ: ZM) could have bought the stock before its value exploded after official usage reports were released. 

The benefits of using alt data for investing 

Alt data allows investors and fund managers to really understand what is happening in a corporation in a more intimate way. Many companies can keep their information close to chest. 

One example would be a company who announces their intention to expand into a foreign  market. This may drive stock prices up but the question remains if they have the real intention to do this and the capacity. Fund managers can use geospatial and satellite imagery data to follow their progress in terms of opening new locations, warehouses and supply chain movement (such as truck deliveries). 

If the publicly presented expansion appears blown out of proportion or completely unrealistic based on current progress, an investor may choose to ‘short’ said company’s stock. If the expansion seems to be going well or ahead of schedule, investors may want to increase fund holdings ahead of anticipated positive movement. 

Final words 

When looking to drive alpha and returns using alternative data sets, you will want to clearly define what you are looking for and what you hope to achieve. First decide which companies or industries you want to focus on, then choose a handful of the most important data points you think will be the strongest investment indicators as well as what type of collection intervals will serve your investment strategy best. 

Once you have a clear picture of your data goals, find out how you can facilitate this project, who will analyze it as well as how you will be able to implement insights into your day-to-day operational investing with little to no latency. 

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