Asset managers have historically relied on traditional data sources such as financial statements, presentations, SEC filings, and sales figures to inform their investment decision. Albeit valuable, this data doesn’t usually give a complete and sufficiently timely picture. The data is not often actionable.
In recent years, fund managers have begun to identify, collect, clean, and analyze alternative data, which is data collected from non-traditional sources. Some of these sources include financial transactions, sensor inputs, web traffic, mobile devices, satellites, public records, and news sites. More often than not, these are sources that are generated outside the companies in question.
Sources of investing edge should be diversified, and in particular diversified away from what one’s competitors are doing. We need to diversify to provide an investing edge, but also to avoid being exposed to the same factors as our competitors, since their losses could then cascade through to our losses. And of course we need to diversify to tell a better story to our own investors as to why we are different and more innovative than other investment managers.
Diversification can be methodological (how to act on information) but can also be materials-based (what information to use). And alternative datasets are a great way to get at new perspectives on a company’s prospects.
