Fueled by better information: Why investment management should embrace alternative data

Vast growth in new data sources and types could be a boon for the investment management sector, where access to the fastest, most reliable, and most relevant information has been important to generating alpha. Some might consider data as the new oil, a ubiquitous resource that fuels many processes—except much more abundantly available. Over the next few years, advancements in storage, capture, and analysis technology are expected to drive steep growth in data volume and availability. Deloitte estimates that by 2030, the global revenue generated by alternative-data providers across all industries could grow by as much as 29x, at a compound annual growth rate of 53%, and possibly reach US$137 billion.¹ The investment management sector is expected to be at the forefront of this growth.

This alternative data largely consists of novel types and forms of data such as satellite images, social media posts, geolocation data, news feeds, and communications metadata that are different from the traditionally structured financial data investment management firms currently use.² So, investment managers may need detailed planning and additional targeted measures to utilize these alternative data sets in their investment decision processes. Organizations that are unable to leverage alternative data’s full potential could operate at an information disadvantage, which could put them at risk of falling behind their peers in their quest for growth in assets under management.

Alternative data has become much more accessible to investment management firms since many companies across industries have started to clean, package, and sell “exhaust data”—data generated at various points in their supply chain—to create an additional income stream.³ In fact, the number of alternative data sets applicable to financial services increased by ~36% over the last two years and the number of alternative-data providers increased by ~29% over the same period.⁴ So organizations that make investment decisions without incorporating inputs from these alternative data sets could leave out more information than they include in their investment decisions.

Many investment managers realize the importance of including alternative data in investment decisions. Investment managers are turning to alternative data to drive process improvement; cater to client demand; find information for new investment strategies such as environmental, social, and governance; and model key performance indicators in innovative ways, with new data sets to extract meaningful insights for alpha generation.⁵ According to a recent survey, 98% of investment professionals agree or strongly agree with the view that the use of alternative data is becoming increasingly important to identify innovative ideas to boost alpha.⁶ Another survey revealed that four out of five alternative investment managers plan to increase their budget for alternative data.⁷ About half of these respondents who plan to increase their budget for alternative data expect an increase between 26% and 50%, and about one-fifth of them expect an increase up to 75%.⁸ These statistics support the rising importance of alternative data in the investment decision process.

Hedge funds were driving the use of alternative data a decade ago, but now the growth is more evenly distributed among all types of investment management firms.⁹ Due to this increasing demand for alternative data, the total revenue generated by alternative-data providers globally is expected to exceed revenue from traditional financial-services data providers in the next six years (figure 1).¹⁰ Investment management firms could be the significant drivers in this tremendous growth journey of alternative-data providers. As the utilization of alternative data becomes mainstream, organizations that rely primarily on their traditional financial data for making investment decisions may be unable to make fully informed investment decisions.