Hedge funds have historically been the most prolific users of alternative data, or information not publicly available in company filings, press releases, news articles or other places. Now, different investors have become the power users of customer transactions, satellite photos, biometric information and other abstruse data that might signal whether an investment is good or bad.
Among different types of investment firms, 65% of hedge funds said they use alternative data on some level, compared with 29% of private equity respondents and only 11% of venture capital firms, according to a 2022 survey conducted in August of 107 portfolio managers, analysts, data scientists and C-suite employees by law firm Lowenstein Sandler LLP. The results were published in a November report titled "Alternative Data: The New Oil for the Digital Economy?"
But private equity firms have suddenly become the power users of alternative data.
In 2020, 50% of hedge funds reported "significantly" using alternative data compared to only 26% of private equity firms and 33% of venture capital firms, results similar to previous years. However, since then, the rankings have shuffled. In 2022, 64% of private equity firms said they used alternative data significantly, followed by 53% of hedge funds. The portion of venture capital firms using alternative data rose to 50%. Put another way: If firms use alternative data, private equity firms rely on it more than hedge funds, which was not the case in the past.
Almost three out of four users spend between $1 million and $5 million per year on alternative data, according to the 2022 survey, and 80% of users said they plan to increase their budget for alternative data next year.
On average, private equity firms also spent more than hedge funds on alternative data — $1.3 million vs. $1.1 million, respectively.