Futures

Growing Use of Alternative Data Among Investors Amid Regulatory Scrutiny and Rising Costs, (from page 20221218.)

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Summary

A report from Lowenstein Sandler LLP highlights the growing trend of alternative investors utilizing alternative data sources, especially in the wake of the pandemic. Hedge funds have been using such data for over a decade, but the adoption has surged recently, driven by the need for real-time insights on economic impacts. Alternative data types include credit card transactions, satellite imagery, social media monitoring, and even biometric data. While consumer transactions remain the most utilized data type, there has been a rise in the use of biometrics and scientific research data. Despite the benefits, firms face regulatory concerns and high costs associated with alternative data, with many planning to increase their spending in 2023. The SEC has also begun scrutinizing alternative data providers for inadequate practices, raising compliance issues for investors.

Signals

name description change 10-year driving-force relevancy
Rise of Alternative Data Usage Investors increasingly utilize alternative data sources for insights into market trends. Shift from traditional data reliance to diverse alternative data sources for investment decisions. Investment strategies will heavily depend on diverse alternative data, reshaping market analysis and forecasting. The need for real-time insights in an evolving economic landscape, especially post-pandemic. 5
Increased Spending on Data Acquisition Firms are willing to invest more in acquiring alternative data for better decision-making. From moderate spending to significant financial commitment toward alternative data acquisition. Investment firms will prioritize data budgets, enhancing their analytical capabilities and competitive edge. The competitive pressure to gain actionable insights and improve investment performance. 4
Emergence of New Data Sources New types of alternative data, such as biometric and geolocation data, are surfacing. Transition from conventional data types to innovative data sources for investment analysis. Investment strategies will incorporate diverse and unconventional data sources, changing analysis methodologies. Technological advancements enabling the collection and analysis of varied data types. 4
Regulatory Scrutiny of Alternative Data Growing regulatory concerns surrounding the use and sourcing of alternative data. Increased vigilance and regulatory oversight from passive to active enforcement against data misuse. Stricter regulations will shape how firms source and utilize alternative data, emphasizing compliance. The need to ensure ethical data usage and protect market integrity. 5
Shift in Data Popularity Consumer transaction data usage is declining while biometric and satellite imagery usage is rising. From traditional consumer transaction data dominance to a more varied data landscape with new favorites. The variety and types of data utilized will diversify, leading to more nuanced investment strategies. Evolving market needs and technological capabilities driving the preference for diverse data types. 4

Concerns

name description relevancy
Potential Regulatory Risks Increased regulatory scrutiny on alternative data usage could result in legal consequences for firms not compliant with regulations. 4
Data Privacy Concerns Using consumer and biometric data raises concerns about privacy, consent, and ethical implications in data collection. 5
Vendor Reliability and Quality The risk of acquiring inaccurate or misleading data from vendors presents challenges in making informed investment decisions. 4
Market Misinterpretation Over-reliance on alternative data might lead to misguided economic assessments and investment strategies. 3
Cost-Benefit Discrepancies The high costs associated with acquiring alternative data may not always justify the insights gained, impacting investment budgets. 3

Behaviors

name description relevancy
Increased Use of Alternative Data Investors are increasingly adopting alternative data sources, such as credit card transactions and satellite imagery, to gain insights beyond traditional methods. 5
Willingness to Invest More in Data Investment firms are willing to spend significantly on alternative data, with many planning to increase their budgets for such resources. 4
Diverse Data Sources Adoption of a wider array of alternative data sources, including geolocation and biometric data, is on the rise among investors. 4
Regulatory Scrutiny Awareness Investors are increasingly aware of the regulatory risks associated with alternative data, leading to more cautious approaches in sourcing. 4
Integration of In-House and Vendor Data Firms are utilizing a combination of in-house data collection and vendor-provided data to enhance their investment strategies. 3
Focus on Cultural and Organizational Insights Some investors are mining online comments to assess companies’ cultural and organizational strengths, reflecting a shift in evaluation criteria. 3

Technologies

name description relevancy
Alternative Data Analytics Using non-traditional data sources like social media and geolocation to gain insights for investment decisions. 5
Biometric Data Utilization Incorporating biometric data for evaluating company performance and cultural strengths. 4
Satellite Imagery Analysis Employing satellite imagery to monitor retail activity and consumer behavior. 4
Geolocation Data Mining Extracting insights from geolocation data to assess market trends and consumer habits. 4
Online Sentiment Analysis Analyzing online comments to gauge company culture and employee sentiment. 4

Issues

name description relevancy
Alternative Data Utilization Investors are increasingly turning to non-traditional data sources for investment insights, indicating a shift in investment strategies. 4
Regulatory Scrutiny of Data Providers Regulatory bodies are beginning to scrutinize alternative data providers, raising concerns about compliance and data integrity. 5
Increased Spending on Data Acquisition Investment firms are significantly increasing their budgets for acquiring alternative data, signaling a shift in resource allocation. 4
Emerging Data Types New forms of alternative data, like biometric and geolocation data, are becoming more prevalent, changing the landscape of investment analysis. 4
Risks of Material Non-Public Information There are growing concerns regarding the acquisition of material non-public information through alternative data, posing legal risks for firms. 5
Vendor Vetting Challenges Investment firms face difficulties in vetting alternative data vendors, which can lead to compliance issues and financial risks. 4