Jul 22, 2021

Alternative data is growing up. Back in 2018, when we first did research on alternative data, we described the industry as slightly more mature than the infancy stage. Kind of more like a toddler ─ appealing, of course, but still unpredictable and requiring monitoring and careful management. Since 2018, the industry has matured some and certainly the tools to store and wrangle data have advanced. And investment managers today are much more likely to invest in cloud technologies to help manage and take advantage of alternative data.

Three years ago, there were an estimated 250 alternative data providers, a number that has grown today to over 400 providers with thousands of datasets. What’s more, 25% of Cutter Research member firms were not using and had no plans to use alternative data in 2018.

Alternative Data …

is data beyond the traditional financial information, such as prices and fundamentals. Alternative data comes from unconventional and unofficial sources not normally considered sources for economic and financial data, used by investment firms to gain early and predictive insights. The data is often raw, unstructured, and can require AI technologies such as machine learning and natural language processing to turn it into actionable information.

However, the past three years have seen a dramatic shift in the use of alternative data. In our 2021 member survey, we found that the percentage of firms with no plans to use alternative data has dropped dramatically to 12%, and close to 60% now use alternative data in production or are sourcing it for future use. Fewer firms are just considering using alternative data and more are jumping in and actually using it. In either case, firms have had to reconsider their data storage repositories to accommodate alternative data use cases. Alternative data was a driver for 58% of survey participants using a data lake.

We may no longer categorize environmental, social, and governance (ESG) data as alternative given the number of providers and the widespread use of these datasets, but the ESG datasets are huge and require appropriate data storage and tools to work with the data. And data used by investment managers to create their own ESG ratings is still considered alternative. These can include blogs, social media mentions, and news reports, for instance around a company’s environmental impact, treatment of employees, or corporate behavior that could indicate governance issues.

Storing, back-testing, and evaluating datasets used to create proprietary ESG ratings requires big data technology, scalable data storage, and skilled data scientists to analyze petabytes or zettabytes of alternative data, which is often unstructured, to use it effectively. About one-third of Cutter Research members stated they use alternative data as an input to ESG models.

This dramatic increase in storing, analyzing, and using alternative data is one of the drivers behind investment managers looking for flexible and scalable cloud-based data repositories. Back-testing, analyzing, building proprietary ratings, and extracting insights from huge unstructured datasets require substantial storage and compute resources ─ more than most firms have on premises.

Investment managers are moving this data to data lakes and modern data platforms, such as Azure Synapse Analytics and Snowflake, that decouple storage and compute resources. Storage is generally much cheaper than compute resources, so the ability to store huge datasets less expensively, and use compute resources on an as-needed basis to run models and analyze alternative data sets, allows firms to effectively use cloud-based data repositories.

In fact, 54% of 2021 survey participants indicated that spending on alternative data would be earmarked for data acquisition and storage tools ─ a dramatic increase from 2018 when only 24% of survey participants earmarked this kind of spending. While alternative data is certainly not the only dataset driving firms to the cloud, it’s clearly one of the data types that takes the most advantage of what the cloud can offer.

More information on data storage and moving to the cloud can be found in our research report, A Guide to Effective Data Storage in Investment Management, and whitepaper, Tips for Modernizing Data Storage.

Cutter members can check out the Cutter ESG Community, accessible via your dashboard at www.cutterassociates.com to participate in discussions with other Cutter members on ESG topics.

Want to learn more about Cutter membership and Cutter consulting? Contact us at connect@cutterassociates.com.

*All data sourced from Cutter Research member surveys in 2018 and 2021.

Managing Director Kathy McDermott has more than 20 years of experience in the financial services industry. She joined Cutter Associates in 2011 and has authored a number of Cutter Research reports on a wide range of topics. She spent ten years as a consultant for a variety of asset management firms, with a focus on business analysis for front- and middle-office projects.