Investment Management Firms Are Embracing Alternative Data–Patents Can Play a Role

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Alternative data is defined in the context of investing as nontraditional data sets that support investment decisions. With the growth and availability of big data, going outside the normal realms of financial information such as quarterly earnings reports or merger and acquisition news is a trend that’s catching fire in the investment management (IM) community.

The lure of achieving alpha, returns that outperform a market index or benchmark, is driving interest in new types of alternative data. Data scientists at well-known financial institutions are assembling and testing algorithms with hundreds of inputs to get an information advantage. Spending is expected to grow 21% year over year and is projected to exceed US $7 billion by 2020, according to Optimas Analysis.

Current Uses of Alternative Data
 
Hedge funds were the early innovators, with the first known uses taking place around 2008. According to data supplier Eagle Alpha, 78% of US hedge funds are currently using alternative data. Funds focusing on short-term positions take advantage of the improved speeds in acquiring information and additional confidence gained from using multiple data sources.
 
A frequently cited example of alternative data is using satellite imagery to monitor the volume of cars in parking lots at retail stores. Another is analyzing social media sentiment to gauge up-to-the-minute positive or negative feelings about consumer brands.
 

Store traffic can be measured through satellite imagery of parking lots, a common type of alternative data.

Future Uses of Alternative Data

Other types of firms that are focused on longer term investments are beginning to experiment with alternative data, including private equity and tech-savvy investment management firms. With this group’s different needs, new types of information sources that point to a company’s long-term strategy are needed. Patent data is one such source that provides new valuable insights into the company activities as well as macroeconomic trends.
 
By leveraging patent information, investment managers can:
  • Identify new investment opportunities by discovering rapidly growing companies and emerging technologies around the world
  • Learn how companies are leveraging their R&D spends
  • Receive early information when large IP transactions have taken place
  • Improve the accuracy of valuation models with a deeper knowledge of a company’s intangible assets

With growing demand for alternative data, quality control must be performed to ensure the sources are reliable. At IFI CLAIMS®, we clean up and combine patent information from more than 70 sources and provide data enhancements that aren’t available anywhere else.
 
Learn more about patent data for investing.