Unveiling the Enigma: Decoding the Challenges of Alt Data Procurement

June 5, 2024

Alternative data presents challenges for investment firms seeking to integrate it into their decision-making processes. 

The unconventional nature of alt data means it often comes in unstructured formats that are difficult to interpret and integrate with traditional data systems. Furthermore, the sheer volume and variety of data can overwhelm existing infrastructure, necessitating significant upgrades in technology and skills. Ensuring alt data's quality, accuracy, and legality also poses significant hurdles, as firms must navigate complex regulatory environments and ethical considerations. Additionally, the costs associated with acquiring, processing, and maintaining alt data can be substantial, requiring firms to assess the potential return on investment carefully. Together, these factors make effectively utilizing alt data a sophisticated endeavor that demands strategic planning and advanced analytical capabilities.

What is Alt Data good for?

Alt data can significantly enhance investment strategies and decision-making processes in various ways. Here's how alt data is best utilized and why firms might want to employ it:

Enhanced Market Insights: Alt data provides deeper and often real-time insights into market trends and consumer behavior, enabling firms to identify investment opportunities more swiftly.

Competitive Advantage: Firms can gain an edge in predicting market movements and investment outcomes by leveraging unique datasets not readily available or used by competitors.

Risk Management: Alt data helps better assess risks by providing additional information on potential investments, markets, or economic conditions.

Improved Decision-Making: Incorporating a broader range of data sources allows for more informed and robust decision-making processes, reducing reliance on traditional and often overused datasets.

Operational Improvements: Alt data can offer insights into operational efficiencies, potential disruptions, and performance benchmarks, which are useful particularly for private equity and venture capital investments.

3 of the Biggest Challenges of Alt Data?

Investment firms face numerous challenges when incorporating alternative data into their operations. These challenges include ensuring the quality and accuracy of data, integrating diverse data formats, and managing the high costs associated with its acquisition and maintenance. Firms must also navigate complex regulatory and compliance landscapes, protect data privacy and security, and expand their infrastructure to handle large datasets. Additionally, acquiring skilled professionals and maintaining ethical standards in data usage present further difficulties. These obstacles highlight the complexity of effectively utilizing alt data in investment strategies.

Identifying the Correct Data: A major challenge with alternative data is ensuring you obtain the data that truly answers your specific questions. Firms often invest in data sets only to find they do not address their actual needs. To prevent this, it's crucial to formulate precise questions upfront. Concertiv specializes in guiding firms to ask the right questions, ensuring the data received is exactly what is needed, rather than just delivering data.

Data Accuracy within a Panel: Ensuring the data panel covers the entire necessary scope is essential for its accuracy. When data is received, it's often unclear whether the panel fully encompasses the needed spectrum, which can compromise the data's relevance to your firm's needs. Firms must verify that the datasets they use provide a comprehensive view to maintain data integrity.

Overused Alt Data: Once an alt data set becomes widely used, its value diminishes; it no longer offers a competitive edge, and its associated risks decrease. It's crucial to understand industry standards for alternative data sets, benchmark these standards, and discern what data remains valuable versus what is overutilized and no longer effective.

Other Challenges of Alt Data

Complex Data Structures: Alt data often comes in non-standard formats, requiring sophisticated tools and techniques for effective analysis and integration.

High Volume Management: The sheer volume of alt data can overwhelm traditional data management systems, necessitating robust and scalable solutions.

Unclear Data Provenance: Verifying the sources and origins of alt data is challenging, raising concerns about its credibility and legality.

Interpretation and Relevance: Correctly interpreting alt data and ensuring its relevance to specific investment strategies requires deep industry knowledge and expertise. 

Integration and Processing: Difficulties arise in assimilating diverse data formats into existing systems and analyzing them effectively.

Cost Implications: The high costs of acquiring and maintaining alt data can offset potential investment returns.

Regulatory and Compliance Issues: Navigating complex legal and compliance requirements around alt data usage is crucial.

Data Privacy and Security: Protecting data from breaches and unauthorized access is a major concern.

Talent and Expertise: Acquiring skilled professionals in data science and analytics is essential but challenging.

Ethical and Fairness Concerns: Ensuring ethical sourcing and use of alt data to avoid biased decisions is vital.

How Do You Improve Your Alt Data Strategy?

Improving your alternative data strategy, particularly for mid-market investment firms, can be effectively supported by using a procurement-as-a-service platform like Concertiv. Here are five ways to enhance your approach:

Streamlined Vendor Selection: Concertiv efficiently identifies and compares alt data providers, ensuring access to high-quality, relevant data sources tailored to specific investment needs.

Cost-Effective Procurement: Leverage Concertiv’s negotiation capabilities to secure favorable pricing and contract terms, reducing the cost of acquiring diverse alt data sets.

Data Management Optimization: Employ Concertiv's services to streamline integrating and managing alt data sources into existing systems, enhancing data usability and accessibility.

Compliance and Risk Management: Concertiv helps ensure that data procurement complies with relevant regulations and standards, minimizing legal and ethical risks.

Continuous Improvement and Evaluation: Use Concertiv’s tools and expertise to continuously evaluate the effectiveness of current alt data sources and identify emerging data that can offer new insights, keeping your data strategy ahead of the curve.

While alternative data offers immense potential for enhancing investment strategies and gaining market insights, its utilization is fraught with complexities. Firms must tackle challenges related to data quality, integration, regulatory compliance, and the necessity for advanced technological and analytical capabilities. Despite these hurdles, the strategic use of alt data can provide significant competitive advantages and deeper market understanding. As such, investment firms are encouraged to develop robust strategies, leveraging tools and platforms like Concertiv to navigate the complexities and maximize the value derived from alternative data.

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