Alternative Data Is Investors' Ally Against Volatile Markets

This volatility made headlines recently in the UK when, on 13 April, the economy unexpectedly shrank by 0.3% and the FTSE Index closed more than 100 points down.

During these unstable times, it is vital that investors have all the necessary information on prospective businesses and their performance to ensure that their investments are not wasted. To do this, investors would usually turn to tried and trusted sources - such as earnings reports, SEC filings, financial statements, management presentations or press releases - to gain insight into a business's performance. While these do provide informative, reliable data on a company's financial footing, relying on them as a main driver for investment decisions does have drawbacks.

The problem with relying on earnings reports, for example, is that they are only available periodically and when a company releases them. This means that, in between earnings announcements, investors can be left with little information on how a business is performing - relying on previous, out-of-date financial information for guidance, which is especially risky in current market conditions. 

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Taking an ‘alternative' approach

However, we are starting to see a change in what information investors use to gauge where smart investments can be made, especially in the US. The collection of challenges previously outlined, as well as access to new technologies and solutions, has seen many state-side investors turn to alternative data to identify new opportunities.

The reason alternative data is being embraced by some is because it provides what traditional go-to sources (earning reports) cannot: access to real-time, quantifiable data that can be used to identify businesses and sectors they should be investing in.

For example, if investors can access the web-based data of a business, or multiple companies operating in a certain sector, they gain access to information such as website visits, purchase conversions, and page views, as well as compare their website's current performance against previous time periods.

Understanding which businesses and sectors are seeing increasing or decreasing web performance (traffic, conversion, engagement, search etc.) can then be used to identify the firms and industries they should be targeting. 

It is not just web metrics and analytics where this principle applies: alternative data such as payment transactions, social media sentiment, and app usage are all providing vital information to inform future investments. The key benefit of all of these forms of alternative data is that they can be accessed whenever they are needed and are not reliant on businesses releasing performance information.

This allows investors to make immediate decisions on whether or not they should be investing in them - something that goes a long way when many firms are facing heavy economic and market pressures. 

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Courage in times of adversity

While the US has been at the forefront of harnessing alternative data, as seen with many of the major Wall Street banks, including JP Morgan and Citibank, regularly citing these data sources in their equity research reports, in the UK, and Europe more broadly, the practice of using this information is still yet to be fully embraced, with many choosing to stick to the safety of traditional sources.

While there is understandable hesitancy about moving away from tried and trusted resources, this ambivalence from UK investors to utilise alternative data could see them being left behind. They could be missing out on huge investment opportunities that will be taken up by others, while at the same time increasing the chances of them making more risky decisions at a time when stability and confidence are vital.

There is no such thing as certainty in business, and never is that more true than when a cauldron of challenges like those we're seeing today are put upon the UK and global economies. However, that doesn't mean that investors should rest on their laurels and stick to what they know. Quite the opposite, now is the time for investors, particularly in the UK and Europe, to explore embracing new ways of working to drive better investment decisions.

By harnessing alternative data, investors can ensure they have a broader range of vital information they need, when they need it and in real-time, to navigate the current and upcoming storm - and come out of it bigger, better and stronger.

Ed Lavery is VP of investment intelligence at Similarweb

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