Use of alternative data grows, with increased interest in AI: report

More investors are using alternative data to gain an edge in investment decisions, according to a new report, but that doesn’t mean firms are spending more as sources become more mainstream.

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

The firm’s survey of alternative investment managers found that the percentage of respondents who said they’re using alternative data (62%) doubled from last year. It noted that Bloomberg LP began offering its terminal users an alternative data function that tracks consumer transactions and location analytics.

“Once regarded as a novel way to generate alpha, alternative data is now increasingly considered mainstream, an unsurprising development given the highly competitive market for attractive returns,” the report said.

It noted that firms are looking for ways to integrate artificial intelligence (AI) and alternative data, most commonly to analyze data, find insights and predict outcomes.

While more investors are using alternative data, the report said firms aren’t spending more for access amid greater competition and innovation from suppliers. “However, whether smaller budget increases are a direct result of more competition, a volatile economy, or just a more cautious approach from investors is unclear,” it said.

Only 7% of respondents said their organization spends between US$3 million and US$5 million on alternative data, down from 24% the previous year. Most respondents said their organization spends between US$100,000 and US$2 million.

Firms were keen to spend more on integrating AI with alternative data, with roughly three-quarters saying their firms plan to increase their budgets for this purpose in 2024.

The most popular source of alternative data in this year’s report was the internet of things, or objects connected to the internet via sensors and software. Consumer transactions and social media were next, followed by cloud platforms, geolocation data, scientific research and web scraping.

The report also noted a shift in the types of investors relying on alternative data. While hedge fund investors were early adopters, the latest survey showed use was more spread out among private equity and venture capital funds as well.

“The biggest increase in usage came from those in venture capital — perhaps driven by the need for a more rigorous investing approach amid a broad downturn in the startup market,” the report said.

Almost 80% of respondents from venture capital firms said they’re using alternative data, up from 11% a year earlier; for private equity investors, it was 63%, compared to 29% the previous year.

However, while more investors were using alternative data, less than half of respondents (43%) said their usage was significant, compared to 58% a year earlier. The report’s authors pointed to some of the concerns cited as potential reasons for the more limited use. These included data/security breach issues (38%), lack of confidence in deriving value (34%), regulatory scrutiny (24%), and the ability to extract/distinguish relevant data from a large volume of data for decision-making (34%).

Lowenstein Sandler surveyed more than 100 investment professionals from hedge funds, private equity firms and venture capital firms between Oct. 25 and Nov. 16. More than three-quarters of the firms (78%) had US$500 million to US$5 billion in assets under management, while 16% managed more than US$5 billion and 8% managed less than US$500 million.