According to law firm Lowenstein Sandler’s annual 2023 Alternative Data Report, the percentage of survey respondents currently using alternative data doubled from 31% in 2022 to 62% in 2023. Users from Venture Capital and Private Equity Firms eclipsed Hedge Funds as the most active users of alt data.
2023 Survey’s Key Findings
According to Lowenstein Sandler’s 2023 survey on the use of alternative data, 62% of all participants said they currently use alt data – up from 31% the previous year. What is also interesting is the fact that in the 2023 survey, 78% of Venture Capital Investors say they use alternative data (up from 11% in 2022), while 63% of Private Equity firms also use alt data (up from 29% in 2022). Hedge Funds, who were previously the most active users of alt data, found their use plunge in 2023 as only 48% say they currently use alt data (down from 65% in 2022).
In 2023, 43% of survey respondents said their usage of alt data was significant compared to 58% who characterized their use of alt data as significant in 2022. As you can see from that chart below, 48% of users working at Private Equity firms deemed their use significant in 2023, compared to 43% at Venture Capital firms, and 31% at Hedge Funds.
This compares to the 2021 Lowenstein survey, where 50% of hedge funds reported significant use of alternative data, 26% of private equity firms, and 33% of venture capital
investors reported the same. But in the 2022 survey, private equity firms led the way with 64% reporting significant use of alt data, followed by 53% of hedge funds and 50% of venture capital investors.
Lowenstein’s annual surveys have consistently tracked investors’ use of an increasingly diverse range of alternative data sources. Similar to last year, the most frequently reported sources in the 2023 survey were consumer transactions (54%) and social media (54%). However, this year, the most popular source was the Internet of Things (59%), which connects objects to the Internet via technology like sensors and software. There were also notable gains in web scraping (27% in 2022 to 37% in 2023), scientific research (27% in 2022 to 41% in 2023), and geolocation data (30% in 2022 to 44% in 2023).
The 2023 Lowestein Sandler survey suggests that organizations are devoting more of their budgets to alternative data than in previous years. Only 7% said their organizations spend between $3 mln and $5 mln annually on alternative data, down from 24% who said this in 2022. Most respondents (82%) said their organization spends between $100,000 to $2 mln.
A majority of respondents in 2023 (75%) said they expect to increase their budgets for alternative data. However, this year’s survey respondents predicted smaller increases than in 2022. For example, just 28% of respondents believed their budgets would increase by more than 25%, down from 65% who expected such a gain last year.
Respondents in the 2023 survey cited a variety of concerns with using alternative data. Among the most cited concerns were data/security breach issues—38% identified this as a big issue in 2023, more than double last year’s 15%. Lack of confidence in deriving value from alternative data (34%), the ability to extract/distinguish relevant data from a large volume of data for decision-making (also 34%), and increasing regulatory scrutiny (24%), were the other most frequently cited concerns with using alternative data in the 2023 survey.
The 2023 Lowenstein Sandler survey reveals that investors’ reliance on alternative data for ESG investing is fading. Only 22% said their organizations use alternative data largely to gain insight and generate alpha in ESG investments, down from 33% who said this in 2022. However, some enthusiasm still remains, with 72% of survey respondents indicating they use ESG data to a moderate extent.
One of the most popular topics in the financial press is the potential benefits of leveraging artificial intelligence. This potential is not lost on investors, who have already begun integrating AI into their investment strategies. Hedge funds appear to be the most aggressive—with 24% responding that their firms are using AI in conjunction with alternative data on a fully operational basis. Future interest in AI appears widespread as 52% of the industry is currently using AI in conjunction with alternative data on an evaluative basis, whereas only 8% are not using AI in conjunction with their alt data operations and have no plans to do so in the near future.
Our Take
The 2023 Lowenstein Sandler Survey on alternative data use is extremely interesting as it continues to highlight the growing appetite among institutional investors for this type of input to their investment decision making process. This year’s report also reveals that although hedge funds remain active users of alt data, private equity and venture capital firms have become more aggressive users of alt data — a trend that is likely to grow in the coming years.
We also found the questions Lowenstein Sandler asked about ESG data and AI to be extremely insightful as they show that the financial industry is growing lukewarm on ESG data, and much more excited about the prospects of leveraging AI to streamline data analysis (70% of survey respondents), predict outcomes (69%) and find insights (57%).
As we have said in the past, the annual Lowenstein Sandler survey provides an extremely valuable insight into the types of alternative data used by hedge funds, private equity firms and VC firms, how this use is changing, and how much these firms are currently spending, and plan to spend in the future, on this type of data.