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Long-term investment strategies thanks to Alternative Data

Marco Belmondo

As is well-known, the term “alternative data” refers to all alternative data in regard to traditional data, that are commonly used to evaluate companies. No longer only financial statements or documents from the Chambers of Commerce, but also a whole series of digital data, coming from forums, web, e-commerce platforms, social networks or maps. These data grow exponentially year over year and become increasingly important, not only to generically collect information, but also to carry out specific actions, such as optimizing investment choices in the stock market or in the loan portfolio of a financial institution, examining the credit risk of a single company, in the best way. Alternative Data are therefore a unique opportunity, both to seize new investment opportunities and to understand long-term trends and therefore realize in advance which companies will grow the most in the medium-long term.

Why you should use alternative data for optimizing long-term investment strategies

It could be mistakenly believed that alternative data are purely usable to capture momentary phenomena, such as small market fluctuations caused by the choices of individual investors, albeit they are very significant. But in truth, alternative data are able to see the so-called weak signals, that is those market trends that are very difficult, or even impossible, to be caught in time by official documents. In fact, the latter are now available to everyone and moreover they suffer a significant delay by the time of an event to the publication date. Instead, our competitive environment is particularly rapid and constantly evolving, both from the point of view of sectors that interest consumers the most, and of specific products and services seen as most valuable.

So then, how do we respond to this extreme speed of the market? By leveraging on different information that, especially if they are integrated with each other, can really anticipate up way the current trends? This is where alternative data come in, analyzed by using advanced techniques, such as machine learning algorithms and natural language processing.

To better understand the subject matter, it is necessary to know in detail the definition of “weak signal”. This term refers to those signals, which can be understood through texts, images, comments, reviews or tweets on the web, which have not yet turned into an impact on the price of a bond, for instance. This may apply to for large and small stocks. It is probably no surprise that the web is full of information and opinions, about pretty much everything.

Examples of the use of alternative data

A great example of using alternative data to optimize long-term investment choices could be the ability to anticipate a corporate crisis. As is well known, a corporate crisis is an unusual event of a company or organization that can affect the regular management of the company, and jeopardizing the very existence of the company, in some cases.

Like any non-recurring and extremely rare event, it is quite complicated to use ordinary economic and financial analysis tools and via these to be able to predict a corporate crisis sufficiently in advance. Instead, alternative data are able to foresee a development plan not yet evident on the market much earlier. Consider, for example, a company that begins to receive a series of negative reviews on the main social networks. Clearly, this will not have an immediate impact on the financial statements, also because these are usually released with months of delay, but it will tell us a lot about medium-term conditions of the company itself.

On the other hand, it could be considered to use alternative data to analyze an entire sector, thus figuring out which products or services are considered of greatest value for consumers at that time.

We can therefore summarize the use of alternative data as a continuous automated listening to the opinions of consumers, or the moves that an organization makes in order to reach prospect customers. This can be applied in case of a large multinational listed on the stock exchange, but also for a small or medium-sized enterprise operating in a specific territory.

FinScience’s alternative data solutions

FinScience, tech company of the Datrix group, is one of the few companies that makes Alternative Data Intelligence solutions available in a simple and accessible way, even for private investors. A winning combination of automated collection and analysis of huge amounts of data, using proprietary machine learning algorithms, which supports investors in understanding the online reputation of a single company and its score in terms of financial sustainability and also sustainability in a narrow sense. This last point ties in with ESG Analysis solutions, in other words the measurement of sustainability, from the integration of traditional and alternative data, developed by FinScience itself.