Executive Summary
Alternative data continues to strongly influence the decision-making of investment professionals across all areas of the investment management industry.
In a testament to the rising importance of alternative data, the multi-billion dollar financial, software, data, and media company Bloomberg L.P. this year announced an alternative data function for its terminal users, which allows them to incorporate consumer transactions and location analytics into their investment strategies. In its announcement, Bloomberg said it was "democratizing access to alternative data."
However, while the number of investors using this resource continues to grow, a recent survey by law firm Lowenstein Sandler LLP has found that, in 2023, budgets devoted to acquiring and using alternative data are not growing with the same momentum as they have in previous years.
Lowenstein Sandler has surveyed investment advisers for hedge funds, private equity funds, and venture capital funds for four years in an initiative aimed at understanding the role played by alternative data. Alternative data, which boasts a market estimated at $4.7 billion, includes forms of information not contained in company filings, press releases, analyst reports, or other traditional sources, such as credit card transaction and mobile device data.
This year's survey reaffirms that alternative data has become deeply ingrained in the investment landscape. In 2023, twice as many survey respondents as last year indicated they are currently using alternative data. 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.
In 2023, twice as many survey respondents as last year indicated they are currently using alternative data.
Investment advisers to hedge funds were originally the most aggressive early adopters of alternative data. However, this year, the survey saw more balanced usage among respondents at hedge funds, private equity funds, and venture capital funds. 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.
Lowenstein's 2023 survey respondents reported using a variety of alternative data sources. Credit card data and consumer transactions are still popular; however, reliance on other categories, like web scraping and geolocation data, has increased. The Internet of Things (IoT) ranked as the most popular source of alternative data used by respondents.
In a shift from earlier years, this year, two out of every three respondents said they were confident that alternative data budgets would rise next year, but that their planned increases would be less than those they had anticipated last year. Increased innovation and competition among suppliers may contribute to reduced costs; 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.
The Emergence of AI
"...more than half of respondents said they were currently using AI on an evaluative or fully operational basis, and that they planned to invest more in it through 2024."
A significant factor driving alternative data this year is the emergence of generative artificial intelligence (AI), with its potential to help firms process enormous quantities of information. For the first time, Lowenstein asked survey respondents about AI: more than half of respondents said they were currently using AI in an evaluative or fully operational basis, and that they planned to invest more on it through 2024.
Key Findings
62% of respondents--double the amount from last year—said they use alternative data. The greatest increase came from those in venture capital, with 78 percent reporting using it compared to 11 percent last year.
75% of respondents said they expect to increase their budget for alternative data, in line with 79 percent last year.
"Alternative data—with the help of AI—looks like it is here to stay, as evidenced by its increasingly accepted use by hedge, private equity, and venture capital fund managers searching for a competitive advantage. On the other hand, budgets for alternative data may keep pace with its increased use as the market evolves."
28% of respondents said they believed their budgets would increase by more than 25 percent, down from 65 percent last year.
52% of respondents said they believed their budgets would increase by more than 25 percent, down from 65 percent last year. of respondents said they use AI in conjunction with alternative data on an evaluative basis, while 16 percent use it on a fully operational basis. Only 8 percent said they have no plans to use it in the near future.
Alternative Data's Growing Influence
This year's survey shows that the reach of alternative data is growing at a rapid pace. The percentage of respondents currently using alternative data doubled from 31 percent last year to 62 percent this year.
In previous years, hedge funds were reported to be the most active users. However, this year's survey shows private equity and venture capital catching up. Nearly 80 percent of respondents from venture capital firms indicated they are currently using alternative data, a substantial increase from 11 percent last year. A similar jump came from private equity respondents —63 percent said they are current users this year compared to 29 percent last year.
Which of the following describes your firm's current level of alternative data usage?
To view the full article, click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
