Alternative Data in Finance

Alternative Data in Finance

Carlos Salas

Portfolio Manager and Data Scientist

Alternative data is the new gold in finance. Every time that we like, dislike, or post something online, we are creating this new breed of data. In fact, some companies are now using this to predict quarterly earnings and performance. Join Carlos Salas in this video as he explores the benefits and challenges of alternative data.

Alternative data is the new gold in finance. Every time that we like, dislike, or post something online, we are creating this new breed of data. In fact, some companies are now using this to predict quarterly earnings and performance. Join Carlos Salas in this video as he explores the benefits and challenges of alternative data.

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This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Alternative Data in Finance

9 mins 9 secs

Overview

Structured data refers to any data that resides in a fixed field within a record or file, whereas unstructured data refers to any data that does not reside in a traditional row-column database or file. Unstructured data accounts for more than 90% of the world's total generated data. Alternative data has been used to measure supermarket chain performance, measure the organic growth of a fast-food chain brand and measure the number of app downloads to rate the penetration of a new video game release. However, challenges include budget constraints, technological risks and legal and/or compliance breaches.

Key learning objectives:

  • Define alternative data

  • Understand alternative data use in finance

  • Identify the key challenges of alternative data

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Summary

What is structured data? 

Structured (or conventional) data refers to any data that resides in a fixed field within a record or file. For example, macroeconomic indicators or financial statement items would be examples of structured data.

What is unstructured data? 

Unstructured data refers to any data that does not reside in a traditional row-column database or file. For example, unstructured data in finance is the data generated via social media in the form of reviews, news reactions, videos and charts. 

How is alternative data used in the finance industry?

It is estimated that more than two thirds of hedge fund managers are currently using, or are at least actively testing, alternative data sources. The insurance industry has also been proactive at using alternative data such as medical records, professional licence registries and social media activity analysis, among other unconventional sources. This has allowed the industry to more accurately classify all customers based on risk, to improve the client experience and to enhance risk management, liquidity and solvency policies. In the investment management space, we have seen that asset managers have been using alternative datasets more intensively over the past five years in order to screen investment ideas, blending both quantitative and fundamental methods that has resulted in the creation of the so-called “quantamental” investment style. The percentage of investment funds that use or expect to use alternative data sat at approximately 78% in 2020 compared to 52% in 2016, with a budget of over 1.7 billion US dollars per annum and an average investment fund spending of $158 thousand per annum.

What are some examples of the use of alternative data? 

- The use of credit card transactions to measure a supermarket chain performance

- The utilisation of geo-location data to measure the organic growth of a fast-food chain brand

- The gathering of email receipts to understand the activity of food-delivery companies

- The number of app downloads to rate the penetration of a new video game release

- Use of social media data and search engine data to predict quarterly earnings surprises

- Analysis of satellite data such as tanker tracking and crop conditions to identify the impact on commodity prices

- Use of weekly box office data to enhance momentum signals

What are the challenges of alternative data?

Budget constraints. Dataset integration comes with hidden costs with regard to the degree of internal effort.

Technological risks. Events such as vendor blackout risk, IT reputational risk and alternative data delivery format risks should all be factored into decisions.

Legal and/or compliance breaches. Organisations should maintain the highest standards ensuring that all legal and compliance requirements are satisfied.

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Carlos Salas

Carlos Salas

Carlos Salas is a professional investor passionate about the lifelong development of an investment process that blends man and machine. Over the last 15 years, he has worked in investment roles for firms such as Santander AM, BNP Paribas, Jefferies, and LCAM. He is currently pursuing three careers simultaneously - as an investment manager, consultant and lecturer.

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