When you buy through affiliate links in our content, we may earn a commission at no extra cost to you. Learn Alternative data allows investors to get an edge over the broader markets. While most investors take information from traditional sources – such as earnings reports and official press releases, alternative data takes an ‘out of the box’ approach.
In this guide, we explain everything there is to know about alternative data and how it allows investors to become smart and informed traders. We also explore the best sources for obtaining alternative data and how to trade the respective information.
In a nutshell, alternative data provides investors with information that is taken from unconventional sources. This gives investors an edge, as the alternative data might not be readily available in the public domain. Consider a quarterly earnings report for a small-cap energy company. As per filings regulations, the company must publish its results for the quarter – such as revenue, net income, and operating margin. Nobody has an edge here, as the information is published to the broader market at the same time. Now consider an alternative data source like satellite imagery. An investor might have access to an image that shows the energy company has discovered a new mining source that could yield promising results. The investor could then trade this information before the official announcement is made. And hence, they have a significant advantage over the markets. There are many other alternative methods that can be utilized. For example, social media provides a great source of information for wider market sentiment. Suppose a company launches a new product, and it receives a lot of positive feedback across social media platforms. This could illiterate that sales have exceeded expectations. If correct, this would be announced when the company next files its quarterly earnings report. But a smart investor using alternative data will have already entered a position. Website traffic is another common alternative data source to assess market trends and consumer sentiment. For example, if a brokerage website like Robinhood witnesses a significant decline in daily visits, this could highlight that fewer customers are using the platform. In turn, this could increase the likelihood that Robinhood will report sub-par figures in its next earnings call. Although alternative data allows investors to secure a first-mover advantage, the process is legal. This is because the information is already available to the public – it’s just that investors need to put in some extra legwork to find it. That said, alternative data also comes with its drawbacks. For example, there is no guarantee that the information will lead to a stock increasing or decreasing in value. Moreover, the legitimacy of the data is often questionable and subjective. Alternative data isn’t a new concept – it has been used by large investment houses and fund managers for many years. However, the digital age has made alternative data more accessible than ever, meaning that retail clients can also use it to their advantage. Here’s an overview of the main beneficiaries of alternative data. Hedge funds manage billions of dollars worth of capital for their clients. Unlike index funds, hedge funds aim to outperform the broader market, rather than simply replicate it. In order to achieve this, hedge funds use alternative data sources to make smart trading decisions. Hedge Funds have access to vast resources, meaning their alternative data sources are often not available to the average trader. This is because they can form exclusivity deals with alternative data providers, meaning nobody else can access it. Commodity traders regularly use alternative data sources to evaluate potential moves in demand and supply. For example, consider an oil trader that has access to satellite imagery in the Middle East. They notice that tensions are growing in a key oil production area, with troops being deployed. This could signal that war is on the horizon, which will have a major impact on global supply levels. As such, the commodity trader might decide to enter a long position on the price of oil. Similarly, commodity traders also use alternative data to assess weather patterns in key regions. For instance, suppose a trader specializes in soft commodities like wheat and corn. They might have access to alternative weather sources that predict continued drought. In this scenario, the commodity trader might enter a long position, considering the reduced supply could mean an increase in global prices. Note: Those with an interest in commodity trading can check out our guide on the best day trading platforms for 2024. Growth investors focus on new companies that have developed innovative concepts. By using alternative data, investors can assess broader market sentiment for the respective product or service. This enables investors to make informed decisions on the long-term potential of the growth stock. For example, consider a small-cap company that is rumored to go public at some point in the future. An investor looks at alternative data sources like Google searches and online forums. This highlights increasing interest in the unannounced IPO. In turn, this signals that the broader markets are bullish on the prospects of the company. And as such, the investor has sufficient time to ensure they receive an adequate IPO allocation, once the announcement is confirmed. Although retail clients might not have access to the same alternative data for hedge funds, sources are increasingly becoming more accessible. As such, retail clients can now use alternative data to try and outperform the market. For example, retail clients can use social media to evaluate sentiment on a new product launch. They can also use online forums like Reddit to assess wider investment trends. This was the case in 2021 during the meme stock rally. where members of the WallStreetsBets forum collectively invested in distressed companies. Retail clients can also analyze the increased demand for specific skills and qualifications. For example, suppose there is a significant rise in demand for artificial intelligence and machine learning skills. This would highlight that these niche markets are set for unprecedented growth. Therefore, allowing retail clients to find suitable stocks or funds that track these markets. Ultimately, alternative data is all about extracting useful information that yields smart investment choices. Rather than trading off the same information as everybody else, alternative data gives investors a first-mover advantage. There are two stages to the alternative data process. This consists of collecting and analyzing the data, and then making an informed investment decision. Let’s take a closer look at this two-stage process: The initial step is to collect alternative data from reliable and relevant sources. The specific sources will depend on the objectives of the trader and the specific field they operate in. For example, suppose the trader specializes in company acquisitions. This can be a lucrative niche to focus on, as buyouts from large companies can yield significant results for early investors of the firm being purchased. At this stage, the investor has some useful alternative data that could highlight the completion of the acquisition. This is without any official press release or announcement from either company. Once the investor has extracted and analyzed the alternative data, they must then decide how to proceed. One of the main benefits of alternative data is it invites trading ideas on both positive and negative information. As such, the investor can enter a long or short position accordingly. Leading on from the above example, the investor believes that the CEO of a Big Tech company is flying to Berlin to complete an acquisition. The company being purchased is a small-cap stock that trades on the Frankfurt Stock Exchange. If the investor is correct in their belief, they can buy stocks in the company being purchased. If and when the official announcement is made, the likelihood is that the small-cap stock increases in value. This means that the investor can maximize their gains, as they entered a long position before the announcement. There are many different types of alternative data, each yielding useful information for investors seeking an edge. Let’s explore the types of alternative data sources in more detail: Crucially, alternative data is all about thinking outside of the box. Not only in terms of extracting and analyzing the alternative data but how to trade it. This section will detail some real-world examples of how alternative data can yield impressive investment results. More than 4.4 billion people use social media platforms, as per a University of Maine study. This means that social media is a hugely valuable source when extracting alternative data. The data can yield many insights, such as consumer sentiment on products and brand perception across different demographics. Moreover, social media and online forums can also be used to assess stock market trends. A great example of this is the meme stock rally of January 2021. Those with an understanding of alternative data sources like Reddit had ample opportunity to ride the wave. Key metrics would have included increased WallStreetBets members, posts, likes, and shares. Now let’s consider the example of a patent filing. This is yet another method to extract useful alternative data. For example, let’s suppose that a small-cap pharmaceutical company registers a patent for a new drug. The drug is already showing notable results during clinical trials. Moreover, the drug is related to an illness that is not currently curable. From an investment perspective, this highlights that the pharmaceutical company believes strongly in its treatment. And as such, the company wants to protect its intellectual property. Depending on the potential size of the market, this could present an opportunity to invest in the company’s stock. If and when the treatment is approved by the Food and Drug Administration (FDA), the investor could see an attractive result on their stock purchase. Weather conditions can impact entire industries, either positively or negatively. As such, this is one of the most useful alternative data sources to consider. One of the most risk-averse ways of doing this is to purchase call options. Another useful alternative data source is website traffic. Put simply, tracking platforms provide information on the number of people visiting a particular website at any given time. This can yield notable trends that lead to potential investment opportunities. For example, let’s say that a small-cap company operates an online marketplace for buying and selling goods. The marketplace website witnesses unprecedented growth, with the number of visitors doubling as each day passes. This shows that the online marketplace is proving popular with both new and existing users. An investor might then decide to buy stocks in the company. They will wait in anticipation for its next quarterly earnings report, hoping that the company announces a huge increase in revenue and registered users. If it does, this can result in the value of the stock increasing. Similarly, website data can also yield negative results for a company. For example, consider one of the best stock brokers – Robinhood, which is 100% online-based. The more people that visit the Robinhood website, the more likely it is that more investors are trading. And when more investors trade, Robinhood increases its revenue. But what if the number of people visiting the Robinhood website is on a prolonged downward spiral? This would highlight that fewer people are using Robinhood to trade, and thus – the broker is losing customers. In this scenario, an investor could use this alternative data to enter a short-selling position. Satellite imagery is an alternative data source that provides real-time information for shrewd investors. An investor would use this information to enter an appropriate trade. For example, if the palm oil company in question is publicly traded, it might elect to short-sell its shares. Or, the investor might look for alternative palm oil producers, such as those holding a recognized Certified Sustainable Palm Oil (CSPO) certificate. Satellite imagery can also be useful for a wide range of other investment niches. For example, commodity traders focus heavily on the demand and supply chain. Any interpretations of the supply chain can have a positive impact on the price of a commodity. However, there will always be a delay in information when relying on the media for important news. As such, those with early access to satellite imagery showing the Suez Canal blockage would have had a major advantage over the broader markets. Information and data sit at the core of a stock’s performance. After all, positive news will often lead to an increase in the stock’s value. While negative news will have the opposite effect. However, the key issue is that when official announcements are made by a company – everybody has access to the same information at the same time. In other words, nobody has an advantage over other investors. This is where alternative data comes in. In a nutshell, alternative data allows investors to get a first-mover advantage. For example, having insights into supply chain issues before the broader markets will allow the investor to act accordingly. Or, if the investor notices that a newly launched product is receiving negative feedback on social media, they can also enter a suitable trader. Ultimately, alternative data gives investors an edge, enabling them to go long or short on a stock based on real-time information. Let’s explore the benefits of alternative data in more detail. Alternative data sources are used by those seeking investment opportunities at the earliest stage possible. This enables investors to buy stocks in a company before it comes mainstream. For instance, let’s consider Tesla – the world’s largest carmaker. When Tesla went public in 2010, it was valued at just $1.7 billion. Tesla has since surpassed a market capitalization of over $1 trillion. According to Google Finance, Tesla’s stock has increased by over 21,000% since its IPO. So how is this related to alternative data for finance? Well, those investing in Tesla during its early years would have used a wide range of alternative data metrics. For example: Crucially, these alternative data sources allowed growth investors to make smart, informed, and early decisions on Tesla stock. The same concept can be used when evaluating other growth companies and new innovations. Not all data can be relied on – especially when it comes from secondary sources. That said, some alternative data methods are taken directly from the source – ensuring legitimate information. This allows investors to make informed decisions, as they do not need to question the integrity of the data. For example, consider an investor that commissions a private survey. The survey wants direct feedback from customers of a fast food chain. When conducted with a solid methodology, this enables the investor to assess broader sentiment, in terms of food quality, value, and service. After analyzing the survey data, the investor can then enter a trader accordingly. Obtaining reliable and accurate data in real-time is crucial when trading assets. So much so, that delays of even a few minutes can be pivotal. Alternative data can provide faster insights when compared to traditional information sources. This enables investors to secure an early advantage over the wider markets. Trading OPEC announcements successfully is all about timing. For example, those relying on traditional data sources – such as financial news reports, will be at a huge disadvantage. This is because of the time lag between the announcement and publication of the story. In contrast, investors using alternative data sources will listen to the OPEC meeting in real-time. This enables them to enter a long or short position as soon as announcements are made. The vast majority of investors will rely on traditional data sources when making investment decisions. This puts them at a disadvantage for several reasons. For example, some investors will wait for a company to release its quarterly earnings report before making a move. This enables them to assess core metrics surrounding revenue, income, and customer numbers. However, this information will be published to the broader markets at the same time. Meaning, that there is no advantage for investors. In contrast, consider a shrewd investor that uses alternative data sources to help predict the performance of a company. For instance, data can be extracted from social media to assess feedback from consumers on the quality and price of a new product. Moreover, information could be taken from credit card transactions and geolocation data to evaluate consumer habits and trends. The key takeaway is that alternative data offers an effective way to obtain information before traditional data sources make it public. Therefore, investors can trade based on real-time information rather than on the back of an official announcement. Now that we have explained how alternative data works and why it is useful, we can now explore where to find it. This is an important part of the process, as not all alternative data sources are reliable and timely. Below, we discuss the best alternative data providers that are worth considering in 2024. Altindex provides alternative data on stocks and cryptocurrencies, enabling investors to make informed decisions. It offers a significant amount of alternative data points that cover every metric possible. For example, on each supported stock, Altindex provides data on website traffic, customer reviews, employee ratings, patents, and broader sentiment. It also scrapes useful data from social media platforms. For example, the number of followers on Facebook, Instagram, and Reddit, as well as engagement levels. Investors can then use this information to evaluate the potential performance of the stock. Moreover, Altindex also provides an AI score. This combines thousands of data points with artificial intelligence to rate the invertibility of a stock. The AI score can be broken down by brand value, employment rating, user growth, and overall fundamentals. Altindex is also useful for those investing in the best crypto to buy today like Bitcoin. Moreover, Altindex also supports many of the best altcoins. For example, it offers alternative data points on Google trends and Adspend. This highlights whether interest in the specific cryptocurrency is increasing or decreasing. Altindex also offers data on Reddit subscribers, social media followers, and website traffic. Similar to stocks, Altindex also provides an AI score on supported cryptocurrencies. In terms of usability, our Altindex review found that Altindex is ideal for both beginners and experienced analysts alike. There is a handy search box that allows investors to find data on their preferred stock or cryptocurrencies. Users can also find insights into broader market trends. For example, Altindex currently shows that mentions of Wells Fargo on Reddit are up 757% over the prior 24 hours. Altindex also shows that mentions of Bank of America are up 542% over the same period. This allows users to explore the trend and assess if an investment opportunity is present. Another feature of Altindex is it allows registered users to build a portfolio of companies and top trending cryptocurrencies. Altindex will then alert users of any notable trends on their chosen assets. There are no fees to use Altindex, which will appeal to those learning about alternative data for the first time. However, this also means that more people will have access to the same information.
SECFilings.com is one of the best alternative data sources for keeping tabs on new SEC filings. There are many reasons why being alerted on SEC filings can help investors make informed decisions. For example, if a company executive buys and sells its own shares, this must be reported to the SEC. This can yield notable results on the sentiment of insiders. For instance, suppose a company executive invests $200,000 of their own money into the firm’s shares. This shows that the executive is overly bullish on the future performance of the company. SECFilings.com currently has a database of over 18 million filings. That said, the most effective strategy is to sign up for alerts. Users simply need to search for their preferred stocks, and any future SEC filings will be sent via email in real-time. SECFilings.com is completely free to use.
AlphaSense offers an all-in-one dashboard that claims to offer data in seconds, not hours. It covers the vast majority of US-listed companies and provides tens of thousands of data points. This includes everything from industry trends and company filings to sell-side analyses and regulatory documents. Essentially, this includes data that traditional news sources do not report on. Additionally, AlphaSense provides real-time insights on where the smart money is going – hedge funds. AlphaSense also offers an invaluable alerts service for those looking for the best stock picking services. Users will be notified in real-time when data is available on their chosen stocks. Alerts can also be set up for specific industries, such as energy and life sciences. While AlphaSense is a paid-for service, it doesn’t publish its prices. Instead, users will need to contact AlphaSense to receive a custom quote.
Thinknum is an established alternative data provider that supports more than 450,000 global companies. This includes both private companies and public stocks. One area that Thinknum excels in is REIT (Real Estate Investment Trust) data. This provides users with daily information on tenancy rates in all US housing markets. This information can then be used to trade REIT ETFs. Thinknum also excels in tracking global job listing data. This provides insights into hiring trends, allowing users to predict the future financial health of the company. Thinknum also provides data on daily car sales across all major dealerships. This can be broken down by the specific manufacturer and region, providing insights into current and future trends. Thinknum offers bespoke pricing depending on the needs of the user. It also offers a free demo platform, allowing users to take Thinknum for a test drive.
Advan is one of the best alternative data sources for obtaining migration patterns. This includes monthly updates on population numbers throughout the US. Advan claims that its migration data gives users a two-year headstart over official consensus figures. This can be hugely useful for investors seeking exposure to the real estate sector. For example, if the data shows continued population increases in a specific housing market, this can lead to above-average growth. Therefore, investors can secure a first-mover advantage over the broader market. Moreover, Advan claims that historically, its data has a 98% correlation rate with consensus reports. The platform also enables investors to break down key metrics, such as income bands and work-from-home trends.
Choosing the right alternative data provider is a crucial step for investors to take. In many cases, investors will use multiple alternative data sources. There are many metrics that need to be considered, from the investment strategy and goals to the pricing, accuracy, and frequency of the alternative data. Here’s what to consider when selecting a provider: The first step is to assess the relevance of the alternative data to the investment strategy. A good starting point is to create a list of data that would provide valuable insights for the respective market. For example, consider what alternative data would be useful to a commodity trader. This might include the most accurate and up-to-date weather predictions in key agricultural regions. After all, adverse weather can have a negative impact on production levels. If the supply of the commodity decreases, this can increase global prices. Additionally, a commodity trader would also require reliable data on production and storage levels. For instance, if the trader specializes in crude oil, it would require data on the number of barrels being produced each day. One such method is to obtain satellite imagery on major oil rigs around the world. It is crucial to evaluate how credible the alternative data source is. Just like the provider claims to offer reliable data, this isn’t always the case. A good way to assess this is to look at historical data feeds provided by the platform. Then, compare the data to official sources. Similarly, it is wise to assess the methodology of the data provider. For instance, consider a platform that provides daily insights on brand sentiment. Explore what metrics the provider uses to determine whether sentiment is positive or negative. It is also crucial to evaluate the ethical and legal aspects of the alternative data. This has never been more important in a world where Big Data is a valuable commodity. However, not all data is obtained ethically. For instance, investors should assess whether the data collection process complies with privacy regulations in the respective country or region. In the European Union, this would be the General Data Protection Regulation (GDPR). Pricing is another crucial aspect to consider when choosing an alternative data provider. After all, if the data is being purchased for investment purposes, the cost needs to be factored into the expected return on investment (ROI). This is why many alternative data providers are aimed at hedge funds and large investment houses. They can charge high fees for their services, which casual investors might not be able to afford. Ultimately, if the cost of buying the data exceeds the expected ROI, then it doesn’t make sense to proceed. Alternative data will only provide investors with a first-mover advantage if it is delivered in a timely manner. Delays of a few minutes or even seconds can render the data unless. This is why it is important to assess how quickly the alternative data is provided. For example, those signed up to an SEC filings service will want to be notified as soon as the filing is made. The filing should be sent to the user in real-time, via an email or mobile alert. This will give the investor the best chance possible of profiting from the data. Alternative data sources continue to increase their capabilities. This is largely due to rapid advancements in technology. In turn, alternative data has never been more accurate, timely, and accessible. According to a Grand View Research study, the alternative data market in the US alone was worth $4.4 billion in 2022. The same study estimates that the industry could be worth $135 billion by 2030. This represents a CAGR of more than 50%. The future of alternative data is likely to have a much stronger emphasis on the retail client space. This means that casual investors could have access to the same information sources as hedge funds and financial institutions. In its current form, however, the most advanced and timely alternative data sources are unaffordable for many. Further down the line, Web 3.0 technologies like blockchain and the Internet of Things (IoT) could make alternative data more accessible. That said, increased accessibility could also be a double-edged sword. After all, if everyone has access to the same alternative data, it no longer provides an edge in the market. Picking stocks and making new investments can be an overwhelming task, which requires patience and regular research. Therefore, we recommend using a platform such as Benzinga Pro – a financial news and research service that provides stock traders with real-time financial news, stock alerts, and actionable trade ideas. Providing the fastest newsfeed in the game, Benzinga Pro offers custom filters that allow users to stream news intelligently and display headlines from only sources and categories that impact the trading strategy. Through the Benzinga Pro ‘Exclusives’ section, the platform provides hand-picked stories that alert users on stocks on the move. Benzinga Pro also offers positive and negative sentiment indicators to allow users to understand the potential impact of any news story. Additionally, its trusted Stock Scanner helps traders identify opportunities and filter relevant information efficiently. Mobile alerts ensure that users never miss a key moment. Benzinga Pro offers three pricing packages – costing between $37 per month – $197 per month. Real-time scanners, unlockable bonuses, and trading signals are some of the features that can be accessed with the highest plan.
Alternative data enables investors to secure a first-mover advantage in their respective fields. Whether that’s stock investing, commodity trading, or real estate brokering – alternative data can yield fast, accurate, and valuable information. The best alternative data provider for retail clients is Altindex. The platform provides more than 10,000 alternative data points on stocks and cryptocurrencies – free of charge.
https://www.reuters.com/markets/us/bed-bath-beyond-rebounds-meme-stock-rally-2023-01-09/ https://www.reddit.com/r/wallstreetbets/ https://www.boerse-frankfurt.de/en https://www.cnbc.com/2023/06/07/how-gamestops-ryan-cohen-became-the-meme-king.html https://rspo.org/as-an-organisation/certification/ https://www.google.com/finance/quote/TSLA:NASDAQ https://www.grandviewresearch.com/industry-analysis/alternative-data-marketAlternative Data Explained
Who Uses Alternative Data?
Hedge Funds
Commodity Traders
Growth Investors
Retail Clients
How Exactly is Alternative Data Used?
Data Collection and Analysis
Entering a Trade
Types of Alternative Data
Alternative Data Examples
Social Media and Online Forums
Patent Filings
Weather Data
Website Data
Satellite Imagery
Can Alternative Data Help You Make Better Investment Decisions?
First-Mover Advantage
Early Investment Opportunities
Primary and Trustless Data
Real-Time Data
Traditional Data vs Alternative Data
Alternative Data Providers
1. Altindex – Overall Best Alternative Data Provider
2. SECFilings.com – Get Instant Alerts on SEC Filings
3. AlphaSense – All-in-One Dashboard for Real-Time Stock Data
4. Thinknum – Alternative Data Sets for Company-Specific Information
5. Advan – Get Monthly Migration Patterns 2 Years Faster Than Census Data
How to Pick an Alternative Data Provider
Relevance to Investment Strategy
Data Integrity
Ethics and Legality
Pricing
Timing
The Future of Alternative Data
What is the CAGR?
Benzinga Pro: Get Actionable Insights and Stock Trading Tips
Conclusion
References
FAQs
What is the meaning of alternative data?
What is an example of alternative data?
What’s the difference between traditional data and alternative data?
How is alternative data used?
What is the future of alternative data?
