Alt-data access widening information gap among investors
By Robert Davis
18:00, 16 November 2021
As the global economy becomes increasingly digitised, nearly all investment managers are adopting alternative data into their everyday operations. But, while the practice is common in several data-heavy industries, some are raising concerns about whether it tilts the balance against retail investors.
Alt-data refers to any data not collected through traditional means such as public statements, press releases and publicly available datasets. This ranges from social media engagement to raw website traffic and geolocation data.
It is common for analysts in various settings to use alt-data. For example, the US Bureau of Labor Statistics (BLS) uses it to conduct their surveys because the agency is facing a declining response rate and ballooning data-collection costs.
Credit underwriters also use alt-data such as bank account cash flows to better predict a borrower’s ability to payback a loan, according to a memo from the US Federal Reserve.
Make alt-data mainstream
Companies like analytics software maker Similarweb (SWB) are working to make alt-data a mainstream tool for investors. For instance, the company said investors could have seen Peloton’s recent quarterly earnings miss coming if they had used SWB’s technology to analyse Peloton’s website traffic.
Ed Lavery, SWB’s director of investor intelligence, told Capital.com in an interview that SWB’s technology found a 98.5% correlation between the number of connected fitness users on Peloton’s subdomain, members.onepeloton.com, and the revenue the company reported.
The company reported $805m in revenue and a per-share loss of $1.25 compared with analyst expectations of $810m in revenue and a per-share loss of $1.07.
Peloton said in its quarterly shareholder letter that the average number of workouts for its connected fitness subscribers dropped to 16.6 this year compared with 20.7 last year despite the number of subscribers growing by 87% over the same time period.
In response to the earnings report, the stock dropped by 36%, wiping out more than $10bn from the company’s market cap.
Spotting trends
Lavery added that the company’s analyses produced even stronger correlations for companies like Square and Amazon Web Services who are more e-commerce focused.
“Gone are the days of using a single data source to make investment decisions,” Lavery said. “As businesses become more digital, this technology can capture their success in real-time, giving investors a perspective of a company that they cannot get otherwise”.
What makes technology like SWB’s so powerful is that they compile thousands of data points into each analysis, thereby allowing the company’s customers to spot trends in large datasets that other programs cannot compute, Lavery said.
SimilarWeb is not alone in the alternative data space and faces competition from other data providers like Dataminr, Alexa and S&P Global.
Information gap widening
For all its power to predict stock performance, alt-data also may also serve to widen the information gap between institutional and retail investors.
“We used to say that more data means more people are better off, but what we are seeing now is that that is not always true,” said Panos Patatoukas, an associate accounting professor at the University of California Berkeley.
Patatoukas’s research focuses on interdisciplinary capital market functions and value creation along the supply chain. He is also an expert at analysing financial reports and corporate valuations.
He points out that while retail investors may not be able to afford access to such tools, they may play a part in generating the data. Most of the digital actions a consumer makes are tracked, compiled and then re-packaged and sold to financial entities that are higher up the food chain, Patatoukas told Capital.com in an interview.
Asked why a retail investor could not write their own code to perform the same data-collection tasks, Patatoukas said plainly: “We only have so much time on Earth, and we should not be spending all of it analysing data”.
Patatoukas says the alt-data that is typically available to retail investors is often not as developed as the data companies like SWB send to their institutional clients. The difference comes down to money, mainly.
For instance, SWB has a free option that allows its users to access basic data about different websites. However, it sells its enterprise-level product for $699 per month.
Rapid growth projections
Hedge funds and institutional investment managers have been using alternative data in their analyses since at least 2011 when a company called RMS Metrics began making its satellite imagery data available for its commercial clients.
A report from global consulting firm Deloitte in 2017 described alternative data as a technology that “will likely transform active investment management” by augmenting traditional securities valuation.
For example, Deloitte envisioned hedge funds and private equity managers utilising “news feeds, social media, online communities, communications metadata, satellite imagery and geospatial information” in their future valuations, a prophecy that is already ringing true.
The industry is also expected to see significant growth over the next seven years, according to Grand View Research. The firm estimated the industry’s total value at $1.72bn last year and expects the alt-data industry to grow at a compound annual growth rate of 58.5% through 2028.