Alternative Data: The Fastest Growing Industry You’ve Never Heard Of

Alternative Data is growing - really fast.

According to a recent article in Yahoo Finance, the Alternative Data market is growing at a whopping 53% annual growth rate, set to cross $90B by the end of the decade. To put that in context, the global Data Analytics market is growing at 27% over the same period, the global CRM market at 12%, and the world GDP at <5%.

In this post, we’ll walk through what Alternative Data is, how it’s used, and who uses it.

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So what is Alternative Data?   

Alternative Data refers to non-traditional datasets that can be used for business decisions by providing incremental insights beyond traditional data sources. These non-standard datasets offer new angles and predictive insights into business performance, economic trends, and consumer behavior.

Unlike conventional data sources like financial statements, surveys, public filings, and internal data, Alternative Data comes from external unconventional channels such as:

• Web traffic: Tracking online activity to gauge consumer interest.
• Social media: Analyzing sentiment and trends from platforms like Twitter or LinkedIn.
• Satellite imagery: Monitoring everything from retail parking lot traffic to crop health.
• Credit card transactions: Studying purchasing patterns to predict revenue.
• App usage data: Understanding user engagement and retention trends.
• Employment surveys: Assessing company health through labor force statistics.

Ultimately, the value of Alternative Data lies in helping businesses gain a competitive advantage. 

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Alternative Data in the Investment Community

While there are many consumers of Alternative Data, it is primarily used by the investment community, helping them predict stock movements, evaluate company performance, and identify market trends to inform investment strategies.

As a report from BlackRock, a leading investment manager, outlines - Alternative Data grew in popularity during COVID, when investment firms needed new signals to predict company performance. According to BlackRock, investments made using Alternative Data signals largely outperformed investments made using traditional data signals.   

Let’s take a more concrete example using mobile app data, one of the most popular categories of alternative data in the market, in which Apptopia is a leading data provider. By utilizing data from iOS and Google app stores, as well as data from millions of real mobile users, they are able to create industry-leading forecasts that are extremely reliable and accurate.

As highlighted in one of their recent Data Spotlights, Apptopia is able to use its data to extrapolate metrics like Downloads, Daily/Monthly Active Users, Sessions, and Time Spent within common mobile apps like Uber and Lyft. By comparing the data for the two ridesharing companies, investors can infer insights into their market share and relative performance. This in turn allows investors to predict each company’s quarterly earnings and stock movements well before quarterly results are announced, leading to them being able to make competitive trades in the stock market.

Again, the goal of Alternative Data is to unlock a competitive advantage over the rest of the market (“Alpha” as it’s commonly referred to in the financial industry), which investors using Apptopia data are able to do.

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Who uses Alternative Data?

While there are many different types of data buyers, these buyers have different requirements and propensities to buy Alternative Data, depending on the nature of their business.

• Quantitative Funds (Quants) | Buying propensity: High
  At quant funds, investment decisions are made by automatic numerical, algorithmic, and analytical methods rather than human (discretionary) determination. As a result they prefer receiving large amounts of historical data, on top of which they can apply AI and machine learning to uncover patterns and make trades.

• Market-Based Funds | Buying propensity: Medium-High
  The most common type of hedge funds, these funds focus on buying and selling investments in the stock, bond, or commodities markets. They aim to make money by predicting whether prices will go up or down. While strategies vary among funds (fundamental, equity, macro, systematic etc.), they all use data as a component in their investment making process. That data is often interpreted by humans, and as such, these buyers prefer bespoke, customized data feeds or synthesized reports. 

• Traditional Asset Managers | Buying propensity: Low
  Traditional Asset Managers like mutual funds and family offices are financial caretakers managing investments like stocks and bonds for individuals and institutions. They tend to make more conservative investments and therefore tend to rely on more traditional data sources, augmenting with alternative data when needed.

• Private Equity & Venture Capital | Buying propensity: Medium
  These firms are investing in the private markets, often in early stage startups or otherwise opaque industries. Since the return horizons for these firms are longer than other funds, the initial investment decision is a highly considered process. As such, they often look to data to make smarter long-term bets, investment diligence, and ongoing portfolio support. They prefer either self-service data applications or dashboards. 

• Other Industries (Corporates) | Buying propensity: Low
  Typical businesses outside the investment community leverage Alternative Data to gain a deeper understanding of market dynamics and customer behavior. They are often not as data-mature as the investment community and prefer self-service data applications or dashboards. Some examples of corporate uses of Alternative Data include:
  • Analyzing online reviews and social sentiment to refine product strategies
  • Using geo-location data to assess site selection for new stores
  • Scraping patterns from search engines and social platforms to stay ahead of competitors

Looking Ahead

There’s no doubt that the future of the Alternative Data industry is bright, as more companies look to external data for additional signals and competitive advantages. 

As companies reach the limits of the value they can extract from their existing sources of data, they will increasingly look outside their four walls, and look to Data Providers to meet this demand. Through the emergence of the Alternative Data market, we are seeing the next chapter in the evolution of what it means to be data-driven.

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