The Efficacy of using Unstructured Data in

Earnings Prediction and Alpha Generation

Aditya Dhingra

Research Intern, ALPHABETA INC

f20170642@pilani.bits-pilani.ac.in

Sathyanarayanan Palaniappan

COO, ALPHABETA INC

Sathya@alphabeta.io

ABSTRACT
In the constant race to generate ALPHA (excess
return relative to a benchmark index) active asset
managers, hedge funds and traders are constantly
looking for new insights that will help spot
arbitration opportunities. In this paper we examine
the rise of unstructured data (combined with
machine learning techniques) to systematically
mine for patterns and trends. We compare different
kinds of unstructured data on the basis of criteria
such as 1) Quality of data 2) Ease of collection 3)
Ability to generate alpha and 4) Predictive Risks.
We examine the efficacy of models that use
unstructured data to make forecasts. A discussion
on the mainstream applications of analytic
unstructured data such as the use of Natural
Language Processing in sentiment analysis and the
use of satellite imagery data in sales forecasting is
included. We also look at the relationship between
structured and unstructured data variables and the
ability to predict economic variables (augmented
analytics). We test our findings by building our
own model using alternative data. Finally, we
discuss issues concerning privacy, compliance and
intellectual property in relation to unstructured
data.
Keywords — unstructured data, alternative data,
price forecasting, machine learning, augmented
analytics
I. INTRODUCTION
The semi-strong and strong forms of the efficient
market hypothesis suggest that prices of assets
incorporate all information about the assets that are
available in the public domain. However, in the last
decade, the information and data availability being
symmetrical/equal access to all the market
participants, active investment management firms
and hedge funds are struggling to identify ALPHA
generation opportunities. ALPHA is a zero sum
game, a gain for market participant corresponds to
the losses made by another market participant. The
fees and existence of the active managers, depends
on the ALPHA the firm is able to generate.
This has led to the growth of passive investment
vehicles like Exchange Traded Funds (ETFs)
which often post equally good returns as the
actively managed funds, sans the management
fees. As can be witnessed in the last decade, in the
United States, less than 15% of actively managed
large cap funds have beaten S&P 500 [1]. Similar
trends have been witnessed in the net money inflow
to passive investment vehicles as compared to
active investment vehicles [2]. Consequently, there
comes an existential threat for active investment
management firms.
Historically, active investment management firms
build models and spot investment opportunities,
using the data related to company financials, price

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data, macro-economic factors and industry
indicators. These data sets are collectively referred
to as structured data.
With the growth of technology and computational
power, the cost and the availability of structured
data has become uniform across investor
community. The first mover advantage or early
spotting an investment opportunity using
structured data only has lost significance in the
current landscape. This has resulted in firms
looking at data sources outside the financial realm
to spot arbitration opportunities. These include data
from social media feeds, news sentiments, analyst
ratings, earnings expectations, satellite imagery
data, remote sensing data, etc. Together these data
set collectively are referred to as unstructured
data.
The first use of unstructured data can be traced
back to 2008 when a quantitative hedge fund, the
MarketPsy Long-Short Fund LP began using
sentiment analysis in its models [3]. Today such
data is widely used to analyze market sentiment,
forecast fundamentals, review policy and make
socially responsible and sustainable investment
decisions.
The rest of this paper is organized as follows:
Section II discusses the types of unstructured data
that are widely used in the industry, Section III
discusses the relationship between structured and
unstructured data namely the lead/lag effect.
Section IV discusses the efficacy and risks of
developing predictive models using unstructured
data, Section V provides several pertinent use
cases, Section VI illustrates a design approach to
developing such models and highlights challenges
such as access, timeliness and quality of data,
Section VII discusses legal, privacy and IP
implications and finally in Section VIII we submit
our conclusions and suggestions for further
research.
II. UNSTRUCTURED DATA
In the literature, unstructured data is often
classified into two distinct types: Analytic Data and
Alternative Data
● ANALYTIC data
Analytic data include insights, perspectives and
opinions about a company’s performance by
professional financial analysts; often working for
rating agencies, media outlets and consulting
houses. Also called as derivative data because it is
derived based on the underlying fundamental
company or market performance data, these
include consensus revenue /earnings estimates
from the sell-side/analysts tracking the
performance of the company, credit ratings, etc. An
example of an investment strategy utilizing
analytic reports assumes that the wording and
grammar of company filings and credit quality
revisions are generally homogenous until there are
impending events of financial significance. Thus,
the change of language generates a tick. The main
advantage of this dataset is that it is based on some
underlying fact that is interpreted within an
industry or macro-economic context.
● ALTERNATIVE data
Alternative data sources include satellite
imagery/Drones, search engine trends, social
media posts, data from IOT sensors, Weather
patterns, parking lot occupancy etc. In many cases
the data is produced by sources outside the ambit
of the company hence it is primary data.
Alternative data often entails higher acquisition
cost due to lack of general availability,
contextualization, (in)completeness and systemic
integration. An example of an investment strategy
based on alternative data is the use of Satellite
Imagery to predict Oil Prices and the performance
of energy and utilities companies (Brittany Weiss
and the Motiva Enterprises). The method of storage
of oils necessitates the use of floating lid tanks. The
level of these lids casts crescent shaped shadows on
the land. The length of this shadow is indicative of
the supply of the natural resource. This is a strong
albeit nuanced predictor of the ensuing oil prices.
Below are examples of commonly used alternative
data sources in the industry today.
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○ Social/Sentiment
(a) Twitter and Facebook have long been used
with a high level of accuracy for event driven
strategies and sentiment analysis. This is achieved
by running Natural Language Processing
algorithms on tweets, comments and the level of
activity. The level of a firm’s promotional activity
and the public response has been leading drivers of
expectations as investors believe that the firm is
creating new markets to drive future sales of
products. Social media, trade magazines and
product blogs have also been used to elicit
consumer response to firm’s products. Narges
Tabari et al, 2018, also proved the causality
between Social media tweets and Stock returns,
[4]. They also proved the causality of higher
volumes of tweets in a day, related to a company,
in the event of a specific news/events regarding the
company/stock.
○ Satellite Imagery
Earth Imaging has long been used to estimate
economic and financial fundamentals such as
shipments for international trade, satellite imagery
of parking lot traffic across major retailers (Zsolt
Katona et al, March 2019) [5] for predicting retail
sales and weather patterns and availability of
natural resources and crop yields for commodities
and companies in the energy sector.
○ IoT/Bluetooth Beacons Sensor Activity
A major application of this is measuring footfall in
retail stores and thus forecasting earnings/sales.
One of the challenges however is the
contextualization of this data to derive insight. For
instance, footfall increase/decrease into a store may
be more attributable to weather than to marketing
strategy,
○ Search Engine Volumes
The volume of search engine queries has been
found to be correlated to some economic and
financial fundamentals. There is evidence of strong
leading relationship between unemployment rate
and internet searches of unemployment benefits
provided by the Government.
III. LEAD /LAG EFFECT OF ALTERNATIVE
DATA
While the usage of the alternative data is slowly
becoming mainstream for active investment
management firms (a study by alternative.org
estimates a spend of $1.7 BN, for the year 2020, on
Alternative Data by investment managers) [6], the
cost of acquisition, sourcing challenges, data
quality and infrastructure needs, have resulted in
the imperative question on what’s lead (or lag)
effect of the data in creating a first mover
advantage and ALPHA generation opportunity.
The chart below provides types of alternative data
and relative popularity of the usage of these data
amongst the funds,
Source: Alternativedata.org
Web data scraping, credit card and debit card
transaction details of the customers, Social
sentiment analyzer are the most popular usage of
alternative data, amongst the active investment
management firms.
1. Web scraping: With rise of e-commerce
online shopping behavior (searching and buying) is
now tracked and analyzed for upticks/downticks in
sales. Aggregated online data can reliably predict
quarterly earnings for businesses that are mostly
online, as demonstrated by the Eagle Alpha case
study on GoPro in 2015. Eagle Alpha, alternative
data provider, accurately predicted the weakness of
sales of GoPro - action camera manufacturer for Q3
2015, by web scraping of data from Electronic
websites and 80 MN sources. Whilst 68% of the
analyst maintained a “Buy” rating for GoPro [7]. A
key challenge is the legality of web scraping. We
will discuss this in more detail in Section VII.
2. Satellite Imagery: Usage of satellite
imagery of parking lot traffic in retail stores, to
predict the performance of retailers, provide the
lead effect of three-day trading window, prior to
the quarterly earnings announcement (Zsolt Katona
et al, March 2019) [5]
Google Search Results: Evidence of
3.
higher Google search volumes, in Russell 3000
stocks, predicts higher stock price in the next 2
weeks and eventual price reversal within the year
(Zhi Da et al, 2011) [8]
4. Sentiment Analyzer with Twitter: With
an 87% accuracy, the Bolleen study predicted daily
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up /down movement of Dow Jones index, based on
the Twitter sentiments which determines the mood
of the market (Johan Bollen et al, 2011) [9]. An
extension of this was performed in [10] where
bullish and bearish sentiments were harnessed
based on tweets over a 3-day observable period and
a decision tree classifier was able to predict
up/down movements correctly nearly 80% of the
time.
IV. EFFICACY AND RISKS OF
UNSTRUCTURED DATA SETS
To be effective in predicting price movements or
earnings, unstructured data is often combined with
structured (fundamental performance) data through
regression models. A typical model attempts to
forecast variation in a structured variable using
other structured variables controlling for various
effects. The regression is performed again with the
addition of an index, created to quantify a
qualitative attribute. The success of the new
addition is reflected through 1) An increase in the
explained variation or 2) A high t-statistic for the
unstructured variable index. However, there is
usually a high risk of multicollinearity among the
independent variables as qualitative factors,
especially sentiments may arise from changes in
the structured variables themselves.
The real benefit of using unstructured variables lies
is their real time currency, which also make them
relatively less popular in developing forecasts with
a long-term investment view. But these models are
increasingly powerful for applications as short-
term trend forecasting or ‘nowcasting’ where data
is released into the public domain with lags. These
lags typically range from 3-30 days. Thus, for
active investment management, this provides a
window of 3-4 weeks before the rest of the market
reacts to traditionally published data.
Asset managers and hedge funds invest significant
resources to procure Alternative datasets. On
average these datasets cost upwards of $100K. And
they come with significant risks. These risks
concern the i) Insider Trading Laws ii) Privacy
risks and iii) Copyright laws. Let us look at some
of these now.
○ Material Non-Public Information Risk
This risk has led to impending SEC/regulatory
crackdowns. There are two dimensions to the
prohibition of such information: Material (the
information must have potential for alpha
generation) and Non-Public (not the same as
exclusive). Public data refers to information that is
non-confidential. In some cases, the confidential
information may be obtained through legal means
even as simple as direct observation.
For example, in studying the availability of oil at a
mining site owned by a mining company, it will be
considered encroachment if the investment firm
plants sensors to study the level of oil rigs, however
if an employee may drive around the mining site to
observe the mining machines in action, he may
obtain crucial information which may act as a
substitute without legal consequences. The
information is considered public because it may be
observed by anyone.
In certain cases, investment management firms find
ways to estimate confidential variables such as
sales without requiring the consent of the firm in
question. In case of non-public information, firms
must ask themselves and their data vendors if the
data is a consequence of a violation of a fiduciary
duty for example investment bankers are under
legally binding constraints not to disclose
information about their clients even to trading
departments in the same investment bank.
However, it is observed that in a significant number
of cases, firms have willingly granted the right to
other companies they may be in business with, to
use and sell the former’s data.
○ Model Risk
The data may not lead to the discovery of a stable
relationship between any variables. It may not give
rise to a model which may generate any trading
signals. Often times models suffer from over-
fitting errors or biases and do not perform well
beyond specific time periods. Also, there is the
validity risk of a model generating wrong trading
signals owing to noise in the measurement of
variables and the influence of other variables. The
quality and completeness of data also poses
challenges. Unlike audited and certified
fundamental data, much of alternative data is raw,
secured from unknown sources and there is no
guarantee it is not synthetic.
4

○ International trade activity as it could accurately
Privacy Risk
The data may endanger the right to privacy of
individuals if managed recklessly by unregulated
data vendors. This is the case with credit rating or
transactions data. Under no circumstances, should
the subjects of the data be personally identifiable.
However, this is not the major concern as
Investment Management firms are primarily
interested in aggregates and may discard an
individual’s behavior as an inconsequential data
point among millions.
Despite the high processing costs and entailing
risks, asset managers and hedge funds report higher
scope for alpha by leveraging alternative data in
their analysis and modeling.
V. PREDICTING FUNDAMENTAL AND
ECONOMIC VARIABLES
The following use cases illustrate the efficacy of
unstructured data in enhancing forecast accuracy of
fundamental and economic variables.
○ Predicting Retail Sales using traffic
imagery
The year on year traffic growth rate in the parking
lot of major retail stores is used to predict whether
actual sales will fall short of or surpass analysts’
earnings and sales expectations. Satellite Imagery
is modelled through Image Processing Algorithms
and signals are generated based on the traffic
density patterns and compared to corresponding
patterns in the previous year. The signal generated
is controlled for the presence of any discounts or
special offers that might externally influence store
traffic.
This provides a more current leading indicator of
sales volume. A comparison to the actual stock
performance yields the following curve. Bollinger
bands, similar to ones generated by technical
analysts are generated [5].
○ International Trade data using satellite
imagery of ships
Chinese Trade Balance was forecasted using
25,000 time series data as TNI (Trade Nowcasting
Indicators). The predicted values were plotted
against actual levels. The index proved to be highly
correlated leading indicator for forecasting
predict the level of imports and exports also. TNI
forecast was often a better predictor of China
Export and Import trade balances. [11]
○ Using search volumes of unemployment
benefits to predict unemployment rates.
Google Trends is an online publicly available
service which tells us how often a particular
search query was entered relative to the entire
search volume. The steps of the process
of generating an Unemployment index were as
follows (Citi Research) [11]:
• Generate relevant search terms
• Source the search volume for each term
dating back to 2004
• Curate the data and adjust for outliers and
seasonality
• Search terms are ranked by their predictive
scores
• Final index includes a selected basket of
terms, and measures co-movement of
search activity with a particular economic
indicator
The unemployment indicator (based on a 12-month
moving average) was plotted against the
conventional measure from the US Bureau of
Labor Statistics. There was a correlation of 0.88.
The indicator was considered to be a leading
indicator as it showed higher correlation with
subsequent data (0.51) compared to recent
historical data (.46).
VI. MODELING USING ALTERNATIVE DATA
In this section we show a simple approach to
developing a model using an unstructured data set
similar to the use case above involving Google
Trends, for India market. We use insurance as the
industry of choice because of its high online sales
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conversion and the fact that consumers tend to
compare policies online before consulting brokers.
Also, Insurance tends to be a moderately seasonal
product: travel insurance sales rise in months
characterized by summer and winter breaks or auto
and property insurance sales rise during festival
time which features high discounts on big
purchases. Hence our hypothesis is that Google
Search Trends could be a reliable predictor of
insurance premium sales.
A. Data
The data regarding insurance premiums earned by
the top public and private insurance vendors is
published monthly on the Insurance Regulatory
and Development Authority of India. The data is
publicly available for both Life and General
insurance firms dating back to 2004. We will be
primarily interested in sales data for the companies.
The search volume data is taken from Google
Trends. To obtain insights from Google Trends
data, we prepare a list of terms that reflect
consumer attention towards the need for insurance
products. The list contains terms ranging from
‘insurance’, ‘premiums’ etc. Google Trends
provides a monthly average of the number of
searches of the assigned search term conducted
over the past year. The search results may be
constrained over given geographic region and over
specific time periods to look at seasonality effects.
B. Model
The following variables are the structured
independent variables. ‘t’ denotes the current
month for which we forecast the premiums and ‘i’
denotes the ith firm for which we forecast.
i)PREMt-1,i
This is used to maintain continuity in magnitude of
insurance premiums and capture any trends
emerging from sales momentum.
ii)PREMt-12,i
This term is used to capture any seasonal
variation(owing to festivals, vacations,discounts).
Because of the presence of this term, we do not
seasonally adjust the dependent variable, which is
the cumulative premium in the current month.
For the unstructured variable, we will use a LASSO
regression to eliminate the search terms which least
explain the variation in premiums in the absence of
any structured variable terms. The terms which
remain in the model are selected and the rest are
eliminated.
We will run two regressions, including only
structured variables in the former. The metrics for
success of the model are the following:
1)A significant reduction in Mean Absolute Error
(reduction in R squared)
2) High t statistics for the search volume variables.
The market share is taken as a proxy for the number
of search conversions contribution to the ith firm’s
premiums.
PREMt = a(PREMt-1) +b(PREMt-12) +c(SEARCH
MAGNITUDE)+d
We are in the process of acquiring the necessary
data for back testing and validating the algorithm
and our hypothesis. We will publish our findings
and learnings in a subsequent paper.
VII. PRIVACY AND INTELLECTUAL
PROPERTY
It is ironic that there has been a rise in the licensing
and regulation of datasets despite the effort towards
open data sourcing. Data which is by itself is
factual is not subject to any copyright or legal
protection. However, if there is a significant human
or financial investment in the modification,
explanation, visualization or refinement of any data
point, there may be a licensing required to reflect
the effort of the modifier. This was exemplified in
the lawsuit that LinkedIn brought in against hiQ for
web scraping user data from its pages to develop
and sell analytics. The ruling in this particular case
favored hiQ allowing bots to access any
information that is not secured behind a password
protected wall. However subsequently the ruling
has been challenged. And several other companies
have filed similar lawsuits against using
technology to get access to data from public sites.
Intellectual property rights are another nebulous
topic when it comes to alternative data. Does
someone “own” the tweets they post? It turns out
that Twitter users implicitly have conceded all
rights to their posts to Twitter and anyone else who
6
uses Twitter! Facebook operates within similar
principles: once someone posts on Facebook they
concede sharing rights with Facebook and its users.
However, secondary data can be protected based
on originality even if the underlying tweets or
posts or not.
The regulation and compliance framework are still
largely undefined for Alternate Data such as
satellite imagery or IoT devices data. The
categorization of big data as public information is
not completely justified owing to the high
procurement cost of these datasets, making them
affordable only to large hedge funds with high
assets under management. Albeit the risks that the
funds expose themselves to in acquiring these data
sets. However, we anticipate that as open data
sources become more specialized and data vendors
compete to sell credible data and put pressure on
data prices use of alternative data will become
much more mainstream among average investors
and money managers. This will lead to a
subsequent increase in the market efficiency and
awareness of as yet unclassified risks.
VIII. CONCLUSIONS
In this paper we examined the rise of unstructured
data within the asset management firms to generate
ALPHA. We looked at the types of data that these
firms have integrated into their analytical models
to predict performance of markets, industries or
specific companies. We identified some of the key
risks that entail use of unstructured data: namely
cost, quality, contextualization and systemic
integration with existing processes. We
documented several successful use cases of
generating successful trading signals with
acceptable lead times. We also summarized the
legal and privacy challenges that still need to be
addressed before unstructured data becomes
mainstream for average investors improving
market efficiency.
Acknowledgment
We thank our mentor Mr Siva Visveswaran (CTO
& Co-Founder of topXight Labs LLC) in directing
and focusing this endeavor.
REFERENCES
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http://journals.plos.org/plosbiology/article?id=10.
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Open Licenses. Project Open Data. Available:
https://project-open-data.cio.gov/open-licenses/.
The US Federal Government guide to open licenses
and dedications.
Cohen, Dan. 2013.
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call for using CC0 with data, tempered by an
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Kratz, John 2013: Data Citation Developments.
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Korn et al, 2011: Licensing Open Data: A Practical
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http://discovery.ac.uk/files/pdf/Licensing_Open_
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