3 Reasons Why Family Offices Should Pay Closer Attention To Alternative Data
June 18. 2021
The investing process is data intensive. Many investors munge gigabytes of data when evaluating assets before committing funds. However, few investors realize that the data can be categorized into various forms, depending on the source. Traditional data sources such as SEC filings, financial statements, press releases, management presentations, etc., form the most common data categories.
In the current highly competitive environment, traditional data is not enough to give investors the necessary edge. They say no one can succeed when everyone is using the same strategy. Thankfully, alternative data is an upcoming category that is giving savvy investors a significant head start.
What is alternative data?
The term ‘alternative data’ is used in finance to refer to information or proxy metrics originating from non-traditional sources. It includes sources such as shipping data, consumer credit balances, credit card expenditures, satellite data and more. Alternative data provides more accurate metrics and insights into company and economic performance. Investors gain a richer, more granular view of an asset than would be the case when relying only on traditional data sources.
Traditional data sources are popular because they provide a general view of an asset and people are comfortable with how to use them. For instance, a financial statement tells you where a company stands regarding cash flow, operational efficiency, and profitability. A press release keeps you updated on significant developments at the company, but the information does not cover all aspects that may be critical to understanding the asset.
MarketCurrents spoke to Brad Schneider, Nomad Data’s founder and CEO, on why alternative data is gaining momentum. In response, Brad explained how a “differentiated view” on investments is a game-changer. He said alternative data helps investors gain a differentiated view of the market, which is unique and enables better decision-making.
Nomad Data is one in a growing list of alternative data companies that are feeding the increasing demand for differentiated information. More investors, such as family offices, are spending on alternative data because it is reliable and can provide far more detail than is available through traditional sources.
How alternative data can help family offices
Family offices shoulder the heavy task of making investment decisions for high-net-worth individuals (HNWIs). These entities handle billions in investable assets, which increases the need for accuracy. It means they always have to stay ahead of the market when they build a portfolio.
Because everyone in the market depends on company filings and press statements to pick assets, only those that supplement with alternative data can gain an advantage. Here is how alternative data could help family offices to perform better.
1. To gain an objective view of a company’s financial health
In one way or another, traditional data sources lead back to what a company chooses to report. Some companies release official reports after sanitizing the figures, denying investors an independent, objective view of their financial health.
For example, a family office might find online consumer activity more valuable than an investor presentation. According to Mr. Schneider, alternative data helps family offices “to improve their understanding of both new and existing investments.”
2. Alternative data keeps investors a step ahead of the market
Official reports take time to become public because of the keen attention to detail and regulatory processes. Usually, companies want to ensure that every figure they release is explainable, often in a manner that favors their position.
Contrariwise, investors can access alternative data instantly and without hindrances. According to Mr. Schneider, Nomad Data leverages artificial intelligence to ensure family offices can easily find the most relevant datasets regardless of their use case or the level of expertise with data. The company mediates family offices’ information needs with credible data companies, wherever they might be globally.
3. Alternative data is 100% reliable
Mr. Schneider concedes that “alternative data has a learning curve.” Specifically, one needs to “learn what different data sets are actually showing you, what biases they possess, and when they are most accurate.”
In other words, a given dataset is accurate only if approached from the proper perspective. Such nuances constitute the learning curve, but one should be good to go after clearing this hurdle.
In short, alternative data is fully reliable as long as you know how to look at it. This means that entities such as Nomad Data that connect investors with reliable data providers are more important than ever in today’s investment environment.