Alternative Data. What is it, Who Uses it and Why is it Interesting?

Originally published by Forbes

In the world of investing, money managers are searching high and low for new sources of information which may provide an untapped source for creating Alpha.  These data sources are called Alternative Data because they are beyond the typical company filings, earnings calls, or fundamental datasets.  Investors are looking for new signals which may give them an edge over their competitors.

Many say the market for Alternative data is just getting started and is still in its infancy.  However, spending is big and getting bigger each year.  A recent MarketWatch article pegged total Alternative Data spending for buy-side firms at $1.1 billion in 2019 and projected sales of $1.7 billion for 2020.

Early Alternative data sources consisted of credit card transactions, web scraped data, geolocation data from cell phones, satellite images and weather forecasts.  Recent regulations such as GDPR, CCPA, and other privacy issues are creating concerns about some of these sources.

A new source of data rapidly gaining traction is data gathered directly from consumers in a scientific and privacy compliant manner. The data goes beyond a swiping of a card to the motivations and intentions of the consumer who uses the card.  This type of data has been used to successfully predict sales, economic predictive signals such as recessions and future purchase intentions across categories and down to specific retailers.

I recently spoke with Ronan Crosson of Eagle Alpha, pioneers in the alternative data space that connect buyers and sellers of data through their unique platform.  Eagle Alpha just announced their partnership with Prosper Insights & Analytics to bring Prosper’s unique dataset with the behaviors, motivations and intentions of consumers to their clients through their Eagle Edge dashboard.

Gary Drenik:  Eagle Alpha is an aggregator in the alternative data market. The company addresses the fund management industry. What is alternative data and how is it used?

Ronan Crosson: We view alternative data as anything that has not been traditionally used by the fund management industry, which includes mutual funds, pension funds and hedge funds. The most pervasive users of alternative data are algorithmic traders, or quants, who use the data to build computer models to trade various assets, but mainly equities. Over the last decade, the sources of alternative data have expanded dramatically. We have a taxonomy of 24 different types of data. The most commonly deployed alternative datasets are web scraped data, credit card data and consumer sentiment data.

Drenik: Are there any new economy sources of data that fund managers are using?

Crosson: Yes indeed. The advent of the smartphone a decade ago brought all sorts of data possibilities. For example, all the apps on your phone are a rich source of data that fund managers can use to capture alpha. Smartphones are also a source of geolocation data, although this area is a little controversial when it comes to consumer privacy issues. As a side note, any dataset we work with has to be completely free of the risk of personal identifiable information, PII in industry speak. IoT data also has the potential in the years to come as a new source of alt data.

Drenik: You mentioned alpha, what do you mean by that? Can you give me a layman’s example?

Crosson: Alpha is industry terminology for fund outperformance. If a fund outperforms the S&P 500, by say 3%, that 3% is alpha.  We believe better information generates alpha and these days better information is supplied by alternative data. Something easy to understand is credit card data. So, let’s say the credit card data can track sales at The Gap and Old Navy. Then you have a read on how Gap is performing in the quarter. Importantly you have this information at quarter-end and typically up to three weeks before the company actually reports earnings. Plenty of time to trade on your information to capture alpha.

Drenik: It seems to me that this information could be useful to other market participants. Does Eagle Alpha only work with fund managers?

Crosson: For 6 of our 7 years we only serviced investment managers. In the last 12 to 18 months we have seen increasing interest from private equity as well as corporates. Alternative data is more typically called “external data” by corporates. Using internal and alternative data is an essential element in quality decision-making for various departments. Corporates that use more internal and external data sources possess a greater range of inputs and analysis for decision making and competitive intelligence. PE firms are using alternative data to enhance deal origination, due diligence and post-acquisition. Your Prosper data is ideally suited for these purposes, particularly given the disruptions seen across retailers in recent years.

Drenik: Now that you mention it. Can you tell me how you are using Prosper Insights data?

Crosson: Yes, we see Prosper Insights data as ideal for fund managers to gain insight into consumer spending behavior.  I must mention first that many fund managers do not have the resources, requisite technology or manpower to work with large complex datasets such as Prosper.  We have taken on that responsibility and have built intuitive dashboards of Prosper, and other datasets, that these fund managers can easily incorporate into their workflow. That way portfolio managers can gain insights from Prosper data just like their more data-savvy peers. We like to call it democratizing data. We have recently published some reports on Best Buy and Walgreens using information from our Prosper Consumer Insights dashboard. We share these reports with our clients to demonstrate the usefulness of the data.

Drenik:  Thanks Ronan.