This article is part of Seleya's blog series "Investment Research: Time For Innovation".
It is now much harder for investors to gain a competitive information edge. Investors have historically relied on traditional sources of information such as filings, financials and transcripts. While still important, this information has become ubiquitous and less a source of differentiated information.
Investors are increasingly looking beyond traditional sources of information for unique insights. One information category that has emerged rapidly in recent years is alternative data, which can enrich the information mosaic.
Alternative data can help investors form a more holistic view and, sometimes the ground truth, of a company. Often derived from day-to-day business operations, alternative data can be a source of more granular, and sometimes real-time, business intelligence on companies and industries. Many types of alternative data exist, such as transaction data, employment satisfaction ratings, airline seat utilization rates, or shipping port activity.
(Examples of Alternative Data)
With a plethora of data vendors, each promising to offer unique insights, how should investors navigate the data supermarket?
The first, and most critical step, is to clearly define the investment question. What are you trying to get a better view on and how impactful would that perspective have on your investment views? More specific investment questions help to focus your list of data inputs, much like recipes help to focus your grocery shopping list at the supermarket.
Let's say you want to form a view on the strength of the post-COVID economic restart. While investors could track traditional economic indicators, a more forward-looking view might look to incorporate surveys on society's receptivity to get a vaccine jab or tracking business receipts and job openings. Gaining clarity on the investment question enables investors to zero-in on discovering data that generates useful insight.
During the process of selecting which datasets to employ, an investor’s judgment on the importance, sensibility, quality, cost, and effort to analyze the information needs to be considered.
In summary, the investment question should be at the heart of employing alternative data. The subject of our next post will explore how AI-driven analytics can help augment and scale human intelligence.
Seleya Technologies is an industry expert in AI and quantitative analytical tools for financial institutions. We leverage AI to augment human perspectives, enabling financial institutions to make decisions faster, more accurately, and with less bias.
Our two solutions include ExpertAI for institutional investors and ExpertAI ESG™ that scales up a financial institution’s in-house, proprietary ESG assessments.
Our team has been authoring the intersection of AI and investing since 2013. The company is founded by experienced investors and computer scientists with over 20 years of experience developing solutions for financial institutions.