Alt investors using alt data to gain an edge: report

Alternative investors seeking an edge are increasingly using alternative sources of data, and they’re willing to spend more for it, according to a new report.

New York-based Lowenstein Sandler LLP’s investment management group released its annual report Tuesday on how investors are using alternative data — information not contained in company filings, analyst reports or other traditional sources.

The firm said hedge funds have been using alternative data for more than a decade but adoption has increased in recent years, in part because investors sought to gauge the pandemic’s real-time impact on the economy and company profits.

Alternative data includes credit card transactions, satellite imagery of retail stores’ parking lots to gauge shopping activity, social media monitoring and even tracking CEO movements via company jets.

The report noted new sources are emerging. One Japanese asset manager is mining online comments about employers to evaluate companies’ cultural and organizational strengths. Some companies are using geolocation data and even biometric data, the report said.

Consumer transactions remained the most popular form of data, used by more than half (52%) of respondents, but that was down from 64% last year. Biometrics (15% of firms in 2021 to 27% in 2022), scientific research (18% to 27% this year) and satellite imagery (15% to 30%) saw the largest gains.

Lowenstein Sandler reported that the percentage of hedge funds (65%), private equity firms (29%) and venture capitalists (11%) using alternative data remained consistent year over year. However, it found those adopting alternative sources are now relying on them more heavily.

Acquiring alternative data isn’t cheap. Three-quarters of firms said they spend between US$1 million and US$5 million annually, and eight in 10 said they planned to increase their spend in 2023. Most firms used a mix of data gathered in-house and acquired from vendors.

The report also noted risks when it comes to using alternative data. Last year, the U.S. Securities and Exchange Commission brought its first enforcement action against an alternative data provider when App Annie Inc. and its co-founder agreed to pay US$10 million to settle securities fraud charges. The SEC alleged that App Annie — a large provider of market data on mobile app downloads, use and revenue — made material misrepresentations about how its alternative data was derived.

In April of this year, the SEC issued an alert warning investment advisers about some alternative data providers’ inadequate practices.

About one-quarter of respondents to the Lowenstein Sandler survey cited regulatory scrutiny as a major concern when gathering or purchasing alternative data. The most commonly cited concerns were the cost and time associated with vetting vendors; the risk of acquiring material non-public information; and the ability to extract meaningful data from a large volume.

Lowenstein Sandler surveyed more than 100 investment professionals from hedge funds, private equity firms and venture capital firms between Aug. 1 and Sept. 2. Most of the firms (69%) had US$500 million to US$5 billion in assets under management, while one-quarter (24%) managed more than US$5 billion.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.