Investment Advisors Embrace Alternative Data with the Help of Generative AI
Increased Adoption of Alternative Data
Investment advisors are expanding their use of alternative data thanks to generative AI and the competitive advantages they plan to obtain through it, according to the latest report on alternative data from Lowenstein Sandler. The report highlights a surge in the use of alternative data, with 67% of respondents affirming that they use alternative data, and 54% making "significant use" of it.
What is Alternative Data?
Alternative data refers to any information that doesn’t appear in company filings, press releases, analyst reports, and other traditional sources. Investors are looking to alternative data, such as company credit card transactions, geolocation, mobile device data, and social media, to gain a potentially lucrative signal that can be exploited for competitive advantage.
The Rise of Generative AI
The emergence of generative AI is playing a role in the expansion of alternative data. According to the report, 61% of survey respondents say they use AI for investment research, portfolio optimization, or trading, while 58% say they use it for summarizing research and materials. Among those already using AI for investment and trading purposes, 85% say they’re planning to expand their use of it in the next year.
Use Cases for Alternative Data
Investment firms are using alternative data for a variety of use cases, including developing unique investment strategies, generating higher returns while managing risk, and understanding evolving customer purchase behaviors.
Challenges and Concerns
While alternative data can generate alpha, it doesn’t come without risks. The top concern that firms have when it comes to alternative data are data ownership and privacy issues, cited by 36% of survey respondents. There was a three-way tie for second place at 33%, shared by data security/breach, risk of acquiring material non-public information, and increased compliance burdens.
Conclusion
The use of alternative data is no longer a novel concept, but the combination with AI creates the possibility for original insights at a scale and speed that was previously unattainable. As the use of alternative data continues to grow, it’s essential to address the challenges and concerns surrounding its use, including data ownership and privacy issues, data security, and regulatory compliance.
FAQs
Q: What is alternative data?
A: Alternative data refers to any information that doesn’t appear in company filings, press releases, analyst reports, and other traditional sources.
Q: What are some examples of alternative data?
A: Examples of alternative data include company credit card transactions, geolocation, mobile device data, and social media.
Q: What are the benefits of using alternative data?
A: The benefits of using alternative data include gaining a potentially lucrative signal, developing unique investment strategies, generating higher returns while managing risk, and understanding evolving customer purchase behaviors.
Q: What are the challenges of using alternative data?
A: The challenges of using alternative data include data ownership and privacy issues, data security/breach, risk of acquiring material non-public information, and increased compliance burdens.
Q: How do I get started with alternative data?
A: To get started with alternative data, you can begin by researching the different types of alternative data available, including company credit card transactions, geolocation, mobile device data, and social media. You can also consider working with a data provider or consulting with a financial advisor to help you navigate the process.
