According to a recent survey sponsored by Exabel, the Oslo-based alternative data analytics provider, a mere 23% of professional investors surveyed describe their firms’ process for using alternative data in their investing process to be ‘excellent’.
Key Findings from Exabel Survey
In January 2023, Exabel commissioned the market research company Pureprofile to conduct a study with 100 discretionary portfolio managers and investment analysts, to capture their views on alternative data. The survey respondents are based in the US, UK, Singapore and Hong Kong, and collectively manage approximately $969 billion in assets. A few of the key findings from the Alternative Data for Investment 2023 survey include:
Current Alt Data Picture
96% of portfolio managers and investment analysts already use alternative data to support their investment strategies. 16% said they started using alt data within the past 12 months, 39% said it was between one and three years ago, and another 39% said it was between three to five years ago.
The use of alternative data is becoming increasingly important for investment firms to help them identify innovative ideas to generate increased alpha. That is a view that 98% of investment professionals interviewed said they agree with. Half (50%) said they ‘strongly’ agree with this sentiment.
Of those professional investors interviewed, 97% say their budgets for buying and managing alternative data has increased over the past two years. Some 40% say it has increased by 50% or more, with 6% claiming it has more than doubled.
47% of investment professionals interviewed say that half or more of their alternative data budgets goes to buying the actual data itself, with 30% saying this level of spending goes on software and technology needed to analyze it. Some 26% of those interviewed said half or more of their alternative data budgets is spent on headcount and the people needed to interpret the data.
55% of professional investors surveyed said their firms use between five and ten alternative data sets, and 38% say they are using between two and five alternative data sets.
Future Alt Data Outlook
90% of investment professionals expect the use of alternative data by funds to increase between now and 2025.
76% of portfolio managers and investment analysts surveyed think consumer spending data will provide an outsized informational edge in the future. 44% of investors expect a dramatic increase in the use of employment data (e.g. job listings, average salary, employee satisfaction statistics). 35% of investors expect a dramatic increase in the use of social sentiment data (e.g. consumer behavior and reaction to brands’ content and positioning.
Biggest Issues with Alt Data
71% of investment professionals find combining data from different sources the most challenging problem faced when using alternative data. 53% of survey respondents say that processing raw data into a useable format is the most challenging problem, while 49% say that comparing different datasets that are similar is the biggest problem they face.
Just 23% of professional investors surveyed describe their organization’s process for using alternative data in their investing process as ‘excellent’. Some 63% describe it as good, but around one in eight (12%) say it is average.
When asked what the most significant barrier to extracting benefits from alternative data is, 53% of investment professionals surveyed said there is too much of it and it is hard to prioritize, followed by 21% who said its quality is sometimes not good enough. Some 15% identified difficulties in integrating alternative data into their systems as the biggest challenge.
Analyzing Alt Data
71% of portfolio managers and investment analysts surveyed say they use third party software systems to analyze alt data. The study found half (49%) of professional investors interviewed say they use systems provided by data vendors, and 45% use in house built software systems. One in three (33%) say they use basic tools such as Excel and Tableau.
Some 91% expect their use of third-party software systems to analyze alternative data to increase between now and 2028, with 21% expecting a dramatic increase. In terms of why they expect usage to increase, 69% of professional investors interviewed said it is because it is more economical to do so than invest in their own in house systems, followed by 51% who said they provide a more consistent way to work with different types and sources of data.
Our Take
Most of the findings from Exabel’s Alternative Data for Investment 2023 survey were not terribly surprising as alt data use has grown at a torrid pace in recent years. However, we did find investors’ mild frustration with their firm’s process for using alt data to be eye opening.
In addition, we found investors complaints about the difficulties of using alt data to be interesting as a majority (71%) of those surveyed said that combining data from different sources to be the most challenging problem faced when using alternative data. This shows that investors have moved on from analyzing single datasets to more sophisticated approaches which require combining datasets from different sources.