Top 10 Alternative Data Use Cases For Making Smarter Financial Decisions

Top 10 Alternative Data Use Cases For Making Smarter Financial Decisions

Victoria Egba's photo
Victoria Egba
·Jul 14, 2022·

6 min read

Investment firms and financial advisors have previously had to rely on data from sources, including press releases, news articles, quarterly financial reports, and stock offerings, in choosing a suitable investment.

However, due to the rapid advancement of technology and information, buyers are willing for quicker ways to assess market conditions. In order to acquire faster answers from different perspectives, they no longer rely on only traditional financial information sources. Instead, they are increasingly looking to alternate sources of data.

Buy-side vs Sell-side Analysts' Use Of Alternative Data

The terms "buy-side" and "sell-side" don't just apply to the acquisition and disposition of assets. Instead, these phrases describe various positions inside the investment sector. "Buy-side" businesses focus more on making direct investment decisions for certain funds. On the other hand, "sell-side" companies and employment concentrate more on offering services and information to benefit numerous investors simultaneously.

The Top 10 Alternative Data Use Cases

Here are the top 10 use cases for alternative data.

Predictive Modeling

Making educated assumptions about how a stock's price or a company's financial situation will evolve is a significant portion of sell-side analysts' employment. Alternative data enables them to account for various factors that could influence this change, including the availability of goods and resources, customer demand, and broader economic trends. Based on modelling done in a previous market, alternative data may occasionally be used to forecast financial success in a new market.

Research On Investments And Deal Sourcing

Analysts from hedge funds, private equity firms, and other organizations like these use alternative data in their analysis on the buy-side. After all, finding a lucrative offer with minimal risk depends on their first investing study. As a result, their reports and recommendations will be better the more information they know about a potential investment and the more precise those details are.

For instance, to see how customers engage with stores at particular locations, buy-side analysts might enhance their financial analysis with POI, property, and mobility data. What additional attractions are there, and how do they affect the local business? How much and when does the region see foot traffic? Does anyone go inside the business, or are they just passing by? Are there any brands that people frequently purchase at a certain retailer? All of these elements can indicate if an investment opportunity should be taken seriously or not.

Demand Forecasting

Alternative data is another tool that sell-side analysts can use to forecast future changes in consumer demand for certain goods or services. This is important for making performance predictions for certain investments. For instance, foot traffic and transaction data are particularly helpful since they demonstrate how customers interact with certain businesses and brands.

Financial analysts frequently use foot traffic or transaction data from two places with similar geographies or the same area in two comparable time periods to construct demand forecasting models.

Due Diligence

Buy-side analysts must conduct meticulous due diligence on the assets, funds, or businesses they want to strongly recommend to their fund managers for investment after they have limited the field. They must gather as much information as possible regarding the advantages and disadvantages of the potential investments they are considering. Analysts must be very confident in their reports and recommendations because there might be a lot of money on the line.

Alternative data enables analysts to do exhaustive due diligence studies and account for all factors. They might find unexpected abnormalities that indicate an investment has higher risks than its prospective benefits justified. On the other hand, they might also come across certain untapped prospects that increase the profitability of investment above what was first anticipated.

Observing Patent Applications To Spot Innovation

Today, businesses are disrupted more quickly. In order to determine whether a firm will be a wise long-term investment, it is critical to understand how innovative it is. Investors can learn more about the topics that companies are exploring and the findings of their research by reading publicly available patent filings.

Managing Portfolio

A firm must continue to manage its investment portfolios even after investing in a stock or other financial assets. Private equity companies and hedge funds need to keep track of the performance of each investment and prepare for its future with their company after the initial transaction sourcing and due diligence. Alternative data can track the dynamics that are changing for each company or asset and assist in helping businesses decide whether or not to keep a particular investment.

Competitive Advantage

When gathering and disseminating financial information, sell-side analysts typically prioritize speed above accuracy since they have a greater margin for a mistake than buy-side analysts. Alternative data can be helpful in this situation because it is frequently more readily available or accessible than conventional financial indicators.

As an illustration, reliable indicators of a company's performance can be found in official sources of information like press releases and quarterly financial reports. But because they are typically only made available on the company's schedule or in response to a significant event, they are only occasionally accessible. In contrast, businesses typically update their social media feeds considerably more frequently in an effort to maintain client engagement. Analysts can have a more instantaneous understanding of what is happening at a firm and how customers are interacting with the brand by paying attention to these latter channels. They may receive signals from this that enable them to offer predictive investing advice quicker than certain rivals, who might only respond to financial news after it has become official.

Tracking Review Sites For Sentiments

Investors can more accurately predict a brand's growth prospects and future marketing and user experience difficulties if they are aware of how consumers feel about its items. Consider a scenario where a venture capitalist wishes to fund a startup or small business.

Brand Relationships

Observing relationships between businesses, brands, or industry sectors is another application of alternative data, particularly when applied to particular geographical regions. Depending on the performance of nearby or nearby firms, for instance, some businesses might be doing better or worse in specific locations. As a result, performance trends may be influenced by the entry or exit of rival or complementing enterprises.

For instance, a health food shop or restaurant might be successful since the area is home to several gyms that cater to those interested in staying in shape.

POIs and mobility data can indicate potential future alliances, mergers, or acquisitions. Using the aforementioned case as an example, a company entering a new market may be able to establish itself fast if it engages in cross-promotion with surrounding businesses that serve comparable lifestyles but do not directly compete.

On a more specific level, analysts can identify trends in the recent travel patterns of a company's executives by examining publicly accessible data on corporate transportation. It might enable analysts to foresee an acquisition, merger, or other partnership in the works before it becomes widely known based on which comparable businesses are at the destination.

Insights Into Online Activity

Online platforms are being used more frequently for research, marketing, entertainment, and business transactions. Therefore, it makes sense that the Internet can offer a lot of data that could be transformed into financial insights. This encompasses not only individuals' online purchasing, bidding, and selling habits but also their other online behaviour as an indication of how they may spend money offline.

Analysts can utilize site traffic and app usage to evaluate which companies are popular or not. However, they may need to look further to assess how much of that attention is favourable or unfavourable.

Final Notes

In summary, alternative data enables analysts and investors to view businesses and assets from various perspectives. By doing so, they may be able to predict market trends before they materialize or spot investment possibilities or traps they may otherwise miss if using only conventional financial data.

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