Alternative data refers to non-traditional data sources that provide unique insights into companies, industries, markets, and trends. While conventional financial data like earnings reports and balance sheets are useful, alternative data can give investors a more comprehensive view.
Incorporating alternative data into the investment process can help identify emerging opportunities, gain a predictive edge, and make better informed decisions. As alternative data becomes more accessible and analytics techniques improve, it is becoming an increasingly invaluable asset for investors.
Here are the top 10 alternative data use cases that are transforming investment in 2024:
1. Social Media Data for Price Forecasting
Analyzing social media activity and sentiment can provide powerful signals for stock price movements, especially for consumer facing companies. Platforms like Twitter, Reddit, and Stocktwits offer a real-time pulse on investor sentiment and emerging trends.
For example, coordinated buying of GameStop stock (/r/wallstreetbets on Reddit) and AMC stock (#AMC on Twitter) demonstrate how social dynamics can drive prices. In the case of GameStop, retail investors coordinated on Reddit to execute a short squeeze, driving the price up over 1,000% in weeks. This shows the power of social media-driven momentum.
Tools that analyze influence, emotion, momentum, and coordination on social platforms can forecast sudden price swings. AI algorithms parse through endless streams of tweets, posts, and shares to detect patterns. New alternative data providers like Sentiment Investor even perform sentiment analysis of investor earning call transcripts to predict post-earnings stock moves.
According to research from MIT Sloan, a 1 standard deviation increase in Twitter sentiment predicts a 0.14% same-day return for a stock. For platforms like Stocktwits focused specifically on investors, the return prediction increases to 0.26%.
2. Web Traffic Data for Business Insights
Web traffic analytics services like SimilarWeb provide data on monthly visitors, geography, referral sources, and more for company websites. Sudden changes in traffic can indicate emerging opportunities or risks.
For example, a sudden drop in a retailer‘s traffic could signal an adverse event like bad publicity, while a surge in traffic for an e-commerce company could indicate a successful marketing campaign. Comparing traffic data across competitors also provides competitive intelligence.
During the pandemic, analytics firm Second Measure saw Uber Eats‘ web traffic spike 103% in April 2020 compared to January 2020, significantly higher than competitors. This pointed to Uber‘s opportunity in the space early on.
3. Satellite Imagery for Supply Chain Monitoring
Satellite imagery from companies like Planet Labs allows investors to visually track physical business activity. This data can be used to assess production capacity, inventory, shipping volumes, and supply chain health for industries like agriculture, commodities, logistics, and manufacturing.
For example, images showing full parking lots at Walmart stores indicated high demand during the pandemic. Satellite data can also track construction activity, mining output, agricultural yields, and more.
Investment firm Jana Partners used Planet Labs imagery in 2018 to estimate trucking activity and inventory at retailer Hertz, gaining conviction on their short thesis during an accounting crisis. Satellite imagery provides visibility that filings lack.
4. Credit Card Data for Consumer Spending Insights
Payment providers like Visa and Mastercard have access to anonymized credit card transaction data that offers insights into consumer spending patterns. The data reveals rising and falling demand across sectors, geographies, and demographics in near real-time.
This spending data can signal important demand shifts. For example, drops in leisure travel spending presaged COVID-19‘s impact on airlines and hotels. Meanwhile, rising grocery and online retail spending pointed to shifting demand early in the pandemic.
| Category | 2019 v 2020 Growth |
|---|---|
| Online Retail | +146% |
| Grocery | +54% |
| Airlines | -60% |
The granular data even shows category-level trends, like surging growth for online alcohol delivery. Credit card data provides high-frequency demand signals uncaptured in quarterly reports.
5. Mobile Location Data for Site Traffic
Location data from mobile apps provides insights into real-world traffic patterns. For example, tracking mobile devices at retail locations, ports, production facilities, and other sites can serve as a proxy for physical activity.
Investors can monitor traffic volumes to assess store performance, supply chain activity, manufacturing output, and utilization of facilities. Location data provides commercial visibility that financial statements lack.
For example, analysis from Thasos Group showedShopify store visits rebounded much quicker than brick-and-mortar retailers as lockdowns lifted. These granular trends inform earnings expectations and sentiment.
6. Job Posting Data for Hiring Trends
Companies‘ job postings provide useful demand signals, especially for service-based businesses. Monitoring sites like Indeed, Monster, and LinkedIn can detect hiring surges and areas of talent investment. This can indicate workforce expansion, new initiatives, and business confidence.
For example, a spike in cybersecurity job postings at financials hinted at digital transformation efforts within the sector. Job posting data offers workforce insights that complement traditional financial metrics.
| Bank | YoY Change in Cybersecurity Postings (2020) |
|---|---|
| Wells Fargo | +25% |
| Citigroup | +31% |
| Goldman Sachs | +46% |
According to Thinknum data, top banks increased cybersecurity hiring 20-50%, illuminating a priority area.
7. Employee Reviews for Culture Insights
Employer review sites like Glassdoor offer candid assessments of company culture, leadership, and employee sentiment. Monitoring reviews and ratings can provide forward-looking indicators of management performance, turnover risks, and operational issues.
Negative review trends, high turnover, and low approval of executives can signal underlying risks before they manifest financially. The qualitative insights complement quantitative data from financial disclosures.
For example, Thinknum data shows Tesla‘s employee satisfaction declining steadily after 2018, which could impact execution and retention. Trends in reviews can flag human capital risks.
8. Patent Filings for Innovation Signals
New patent filings indicate areas where companies are investing research and development dollars. Monitoring patent applications provides visibility into the innovative efforts and strategic priorities of organizations.
For example, recent patent activity shows investment in next-generation batteries, autonomous vehicle technology, biopharma research, and more. Patent data reveals new innovations earlier than financials or press releases.
According to J.P. Morgan research, companies with above-average patent success, measured in citations and scope, outperform peers by 3 percentage points annually – illustrating the power of tracking innovation.
9. Government Data for Macroeconomic Insights
Government statistics on employment, housing, trade, demographics, and other economic indicators provide invaluable macroeconomic context for investment decisions. APIs like the BEA, FRED, and US Census Bureau offer easy access to relevant government data.
Monitoring leading macro indicators like the ISM Purchasing Managers Index can provide advanced warning on economic shifts. Government data helps investors position portfolios based on the macro climate.
For example, a slowdown in new housing permits and starts foreshadowed the 2008 housing crisis months before it hit bank balance sheets. Macro indicators provide systematic signals.
10. Sustainability Data for ESG Insights
Data on environmental, social, and governance (ESG) factors allows investors to incorporate issues like climate change, diversity, and transparency into security analysis. Data providers like Sustainalytics, MSCI, and ISS offer ESG ratings and carbon emissions data.
With sustainable investing on the rise, monitoring emissions profiles, controversies, labor practices, and governance provides an informational edge. ESG data allows for idea generation and risk management aligned with values.
According to Morningstar, ESG-oriented companies saw smaller stock declines during the pandemic and market volatility compared to non-ESG peers – illustrating the power of monitoring these factors.
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Alternative data provides unique insights that go beyond traditional financial disclosures. From web traffic to satellites, new data sources reveal invaluable signals.
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Leading hedge funds and asset managers are investing heavily in alternative data analytics to maintain their edge. The information asymmetric from alternative data allows funds to generate alpha.
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Use cases range from monitoring business activity and consumer demand to gauging innovation, hiring, macroeconomic conditions, and ESG factors.
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Alternative data empowers investors to make more informed decisions and identifies opportunities using predictive intelligence rather than just historical financials.
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As technology expands access and lowers costs, alternative data is becoming indispensable in taking investment analysis to the next level.
While many alternative datasets require professional-grade analytics capabilities, there are options for investors looking to test the waters:
Tap into data marketplaces – Platforms like Quandl, Sentieo, and 1010Data host alternative datasets ready for analysis. Options range from social media sentiment to credit card spending data.
Leverage public datasets – Many government agencies provide free datasets covering topics like trade, employment, real estate, demographics, and more.
Run web scrapers – For DIY data collection, web scraping tools can pull publicly available data from sites like Amazon, Twitter, review sites, clinical trial databases, and other online sources.
Try analyst platforms – Services like Sentieo and Thinknum allow investors to access curated alternative datasets and run customized reports on them through easy-to-use platforms.
Work with data vendors – For professional grade alternative data, there are specialists that can provide customized solutions, tactical datasets, and analytics capabilities tailored to your needs.
The key is starting small, testing the utility of different alternative data types, and building capabilities over time. With the right approach, alternative data can provide invaluable analytical edge.