Asset managers are increasingly using nontraditional data to make investment decisions — but it doesn’t always come cheap.
According to consulting firm Neudata, which helps investors evaluate data providers, yearly subscriptions for alternative data sets can range from less than $25,000 to $500,000 or more. The most expensive include transactional data like credit card spending, as well as location and web- and app-tracking data. About 30 percent of transactional data subscriptions, for example, cost more than $150,000 a year, Neudata said.
“To us, this makes perfect sense given that data providers operating in these three categories typically collect data on vast panels (often comprising millions of users), requiring a lot of work from the provider in terms of cleaning the data and preparing it for use by the investment world,” the firm said in its 2020 report on data pricing.
Assuming that asset managers use multiple data sets, it’s easy to see how costs could add up. Among hedge funds that were using alternative data in some capacity last year, more than a third spent more than $1 million on data annually, according to a 2019 survey by law firm Lowenstein Sandler.
However, Neudata reported that alternative data has gotten cheaper, with more data subscriptions being offered at prices below $25,000 — and some data being given away for free.
“A common misconception is that useful alternative data is overwhelmingly expensive,” the consulting firm said. “In reality, we find that datasets are more likely to fall within lower price brackets ($25k up to $150k per year) than the most expensive price brackets.”
Environmental, social, and governance datasets tended to be the cheapest, with over 40 percent of subscriptions tracked by Neudata costing less than $25,000 annually. It was also the most likely to be free, although free datasets still made up less than 10 percent of all ESG data offerings.
Satellite and aerial data and sentiment data were the next cheapest categories, with about 30 percent of data subscriptions in each segment costing less than $25,000 annually.
While demand for alternative data is growing among institutional investors, including fundamental managers, Neudata said that this higher demand would not necessarily lead to higher prices.
“The jury is still out on how the growing number of fundamental investors exploring the alternative data space will impact pricing over the long term,” the consultant said. “One could argue that either 1) the resulting boost in demand for data will allow providers to sustain their existing price levels, or 2) providers will need to lower their prices to appeal to fundamental clients with lower budgets than quants.”