Analysis of Alternative Data Market: Alternative Data Take Center Stage
All non-market-oriented demands are pseudo ones, while all non-user-oriented technologies mean cheating users.
Speaking of alternative data, we should not be blindly confident, but let market demands or market expectations confirm the data. We can see the essence through phenomena. In other words, we need to study from space and time of things proper and their related bodies. And keep this in mind, always seek truth from facts.
1. Target | Target Users of Alternative Data
Currently, the wider range of users of alternative data covers three categories, namely buyside, private equity and company. Hedge Fund users mentioned most at this stage belong to buyside.
– Quant on the buyside carries out quantitative calculation based on the numeralization of alternative data to find new Alpha factors and optimize investment strategies.
– Private equity companies are mostly unlisted when making investments. Their financial data are not transparent. Through alternative data, such companies can enrich the dimensions of due diligence data to gain insight into target companies. For example, seen from the operating data (download, uninstallation, activity, etc.) of the target company’s App, the operation status is analyzed and judged through the emotional trend of the target company.
– Companies use e-commerce data, search data and other analysis products to analyze rivals and their products.
2. Time | Past, Present and Future of Alternative Data
Judging whether a thing has vitality or not or whether the future trend is good or bad hinges on its past and present performance. We can call the current phase of alternative data as version 2.0, with the previous phases summarized as version Beta and version 1.0. The Beta version was released probably before 2012 or earlier. According to the theoretical research of scholars, some quantitative analysts introduced non-traditional financial data into the model, achieving some results. The reason why the word “some” is written is that the data noise is too big, lacking effective methods to refine the data. Therefore, alternative data are only applied in some smaller transactions. It may be more appropriate to call this stage Beta.
Despite valuable alternative data, collecting and managing alternative data will consume a lot of energy of quantifiers. Therefore, a group of vendors grow out of the market, collecting and roughly processing alternative data. They sell the sorted data. This model is called the Aggregator of Alternative Data. If compared with the development of e-commerce, these Aggregators are similar to independent small and medium-sized e-commerce companies selling products via their own e-commerce platforms. At this stage, Aggregator companies such as Quandl, Crux, Nuedata and EagleAlpha appeared. We call this stage version 1.0. From 2018 2H to today, alternative data has entered a stage of fast growth and integration in the United States. Industry leaders have begun to map out their plans, with milestone events emerging one after another:
In October 2018, Goldman Sachs and 2Sigma made strategic investment in the alternative data start-up Crux
In December 2018, Nasdaq acquired Quandl
In February 2019, Bloomberg released the alternative data service EAP
In June 2019, Refinitiv made strategic investment in BattleFin
In September 2019, S&P made strategic investment in an alternative receipt company
The entry of giants will bring about changes in the rules of alternative data game, covering pricing rules, sales rules, opening up between alternative receipts, and coupling effect between alternative and traditional data. However, with the existing customer resources and brand advantages, giants will no longer be a single Aggregator but more likely a large Market Place. This is both an opportunity and a challenge for companies that provide alternative data services! The opportunity is that the entry of giants can expand the market for alternative data. The challenge is that the establishment of Market Place as a large e-commerce platform similar to Amazon and JD.com may lead to the loss of the voice and pricing power over the commodity (alternative data) of independent small and medium-sized e-commerce companies. Alternative data companies that are willing to stand out from their peers need to respond quickly and sharpen their sense as much as possible in the 2.0 era in which giants have not gained a firm foothold, so that they can enter the 3.0 era at a fast pace before potentially becoming new giants in the alternative data era.
The 3.0 era of alternative data has not really arrived yet. The window period should still have one to two years left. This is the future of alternative data. Regarding what kind of product type and business model will be produced in the 3.0 era, stay tuned to our further blogs.
3. Market | Market Analysis
The market size of alternative data is illustrated by citing the following three kinds of data.
1) Fast growth in the number of alternative data companies
(Source: alternativedata.org)
Alternative data companies increased from nearly 200 in 2012 to 400-plus in 2018. Because of the absence of the 2019 data, it is impossible to know the number of companies in 2019 accurately. However, if you search Baidu for the keyword “alternative data,” you can see that, compared with the 2018 search data, the number of search results has surged. We judge from the “alternative data of search results” that alternative data companies should grow explosively in 2019.
2) The investment of fund companies in alternative data is increasing year by year. Buysides’ average investment is expected to reach USD2.6 million in 2020.
(Source: alternativedata.org)
3) 80 percent of investment institutions have used or plan to use alternative data. The number of alternative data professionals has risen 4.5 times over the past five years (from AlternativeData.org).
Alternative data have come and will be poised for amazing success with the support of the prevailing trend.