February 6, 2023
Digital innovation is reshaping financial markets. Alternative data has emerged as a new source of insights that can help investors make more informed decisions. To help you navigate the alternative data space, here are 7 questions to ask your data provider.
Traditionally, investment professionals have relied on fundamental data to back their strategies, like filings or quarterly financial statements. Increasingly, investors are tapping new, alternative sources to capture more momentum.
There are many examples and new datasets emerge regularly, but these are some examples:
Not all data is valuable for investors. Datasets need to meet very specific requirements to be exploited by investment firms. Those requirements depend on the type of investment products and strategies.
To help you navigate the alternative data space, here are 7 questions to ask your data provider:
Financial models need to be back tested against a multi-year archive of data to prove performance relative to market conditions. So the deeper the archive, the better. You could typically look for 15 to 20 years of data that has been processed in a consistent way.
In order to test reliably, a simple archive is not sufficient. Datasets need to be able to recreate the exact conditions that a specific strategy would have experienced at any point in the past, to test its reaction in that specific context. Once the data is captured, it needs to be carved in stone.
Perhaps you trade in real time or maybe you rebalance your portfolio weekly or monthly. The frequency and timeliness of the data needs to match your approach. A constant and frequent data feed, with information emerging daily or even every second, helps you adjust your strategies more timely. A typical example of both high frequency, real-time data would be news.
Financial institutions run a substantial legal risk if they use shady data sources, and third-party providers must demonstrate and warrant that their data was acquired legally on an ongoing basis.
If your strategy relies on data, that data needs to remain available for as long as you need it. We can expect news reports or earnings call transcripts to provide an ongoing data feed. It also means your data provider should be a well established, financially stable and trusted business partner.
The trading horizon is the time between entering and exiting a position. Systematic traders running same-day strategies may require intra-day insights - from the real-time analysis of news for instance - whereas portfolio managers with long strategies will only see value in signals that last from a week to a month (like hiring trends).
Alternative data has to provide information that complements existing insights rather than supplement or validate them. In financial terms, these signals are described as orthogonal to existing ones.
Ultimately, your experience with alternative data and the insights you will draw depend on the quality and reliability of your alternative data provider. It is never just a data decision, it is a business one.
RavenPack was recognized as the Alternative Data Vendor of the Year, by the prestigious Risk Markets Technology Awards 2022.
RavenPack Edge is an AI platform that collects, reads, and analyzes billions of documents to help finance professionals and businesses to make more informed decisions, stay ahead of competition and mitigate emerging risks.
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