The Book of Alternative Data

CHAPTER 1Alternative Data: The Lay of the Land

1.1 INTRODUCTION

There is a considerable amount of buzz around the topic of alternative data in finance. In this book, we seek to discuss the topic in detail, showing how alternative data can be used to enhance understanding of financial markets, improve returns, and manage risk better.

This book is aimed at investors who are in search of superior returns through nontraditional approaches. These methods are different from fundamental analysis or quantitative methods that rely solely on data widely available in financial markets. It is also aimed at risk managers who want to identify early signals of events that could have a negative impact, using information that is not present yet in any standard and broadly used datasets.¹

At the moment of writing there are mixed opinions in the industry about whether alternative data can add any value in the investment process on top of the more standardized data sources. There is news in the press about hedge funds and banks who have tried, but failed to extract value from it (see e.g. Risk, 2019). We must stress, however, that the absence of predictive signals in alternative data is only one of the components of a potential failure. In fact, we will try to convince the reader, through the practical examples that we will examine, that useful signals can be gleaned from alternative data in many cases. At the same time, we will also explain why any strategy that aims to extract and make successful ...