Alternative Investment

How is alternative data transforming investment processes?

Data has always been a critical component of investing. At a basic level, data provides an investor with a view of how a company is performing so they can reach a decision about an investment opportunity.

Traditionally data has been sourced from a business’s financial disclosures, tax filings and media reports. In recent years, however, evolving technology and advances in machine learning have offered up a greater variety and volume of data and insights.

Today investors are no longer limited to static documents when conducting their due diligence. They are considering alternative datasets alongside these traditional metrics in the hopes of achieving a more holistic and up-to-the-minute view.  As a result, they can better understand market shifts and dynamics and quickly determine when and why the price of specific stocks and financial products moves.

Recent ‘Meme Stock’ rallies only further highlight the importance of using alternative data, with a lot of market signals happening in online forums like Reddit, before the price moved. Investors came to see that sentiment data provides explanatory power for stock returns and acts as an early indicator for price movements, which are invaluable for realising alpha.

There are several factors contributing to the recent boom of alternative data. First, the Covid-19 pandemic prompted a shift toward online activities that drove firms to explore new types of data. As the various meme stock rallies demonstrated, retail investors are now congregating more readily in digital channels, driving asset prices in unexpected ways.

This is making returns more volatile than anticipated. The launch of more digital channels (NFT marketplaces, for example) provides further avenues for investors to establish new communities online, where investment bubbles can also build and dissipate in minutes. In these instances, sourced from tweets, blogs, forums and news articles, Sentifi’s sentiment analytics acted as an early indicator for price movements.

Secondly, we can point to the buzz around the accuracy of ESG reports and disclosures. The ISSB recently proposed creating a comprehensive global baseline of sustainability disclosures. In the US, the SEC published a proposal requiring companies to disclose emissions data that is verified by third parties.

Within this context, the demand for alternative ESG performance data has risen, providing investors as it does with reliable, granular, and actionable data in real time. Such data enables investors to make informed investment decisions, achieve higher risk adjusted returns and fulfil ESG mandates at both a fund and constituent level.

It is clear that alternative data has become a valuable tool for investment management firms seeking alpha. Collective intelligence investing (CII) – deriving market insights from online communities and crowdsourcing platforms – continues to increase in popularity, creating new growth opportunities and bringing end-to-end benefits to investment management. The future looks bright for alternative data and forward-thinking investors would be wise to align their legacy systems and processes with today’s digital age.

Marina Goche is CEO at Sentifi

Source link

Leave a Comment