Hedge funds gaining trading edge through satellite imagery

Hedge Fund managers are getting more sophisticated in their forecasting. No longer are they leaving their “guess work” to market analysis or company quarterly reports. Instead, more and more hedge funds are flocking to get their hands on satellite data to “survey” their potential investment themselves.  Satellite imagery is experiencing its biggest boom from the investment community, according to a recent report by Financial Times.  “Hedge fund managers are particularly interested in satellite imagery in order to monitor risk exposures around mines, ports, plantations or farmland before making investments.”

“Hedge fund managers are particularly interested in satellite imagery in order to monitor risk exposures around mines, ports, plantations or farmland before making investments.”

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Embracing technological innovations is part of the growing importance of “big data” among the investment industry. As risks of “getting caught” with insider trading have been on a rise in recent years, the use of big data analysis became new (and legal) alternative source for potential excess returns. As McKinsey & Co. concludes in its report: “The payoff from joining the big-data and advanced-analytics management revolution is no longer in doubt.” A Harvard study finds that companies using big data analytics can improve productivity and profit gains by 5%-6% higher than their competitors.[1]

Satellite imagery use by investors is part of this global trend of embracing big data. This now fast growing “business intelligence” was sparked by UBS Investment’s announcement it used satellite data to predict Walmart’s quarterly earnings in 2010. Satellite imagery allows UBS analysts to count the number of cars in Walmart parking lot each month. By cross-referencing the parking lot data with unemployment figures, the investment firm was able to produce a more accurate analysis of the retail giant’s revenue.

Since then, other hedge funds have begun to grab on to the idea of satellite intelligence. As the cost of data has gradually come down over the years, more assets managers recognize the benefits satellite data in giving them trading edge. Enron trading executive Gary Hickerson adopted satellite technologies to help him assess the supply-demand chain in the commodities market.

“We started studying where all the supply points were. One of the things we looked at was feed lots…Can we count cows?” recalls Hickerson. Instead of relying in crop data from USDA, satellite imagery can map the growth pattern of crop yields over time.

Satellite images can demonstrate which of two neighboring mines is producing the most coal, for example,” notes the Financial Times. As more mining projects are located in remote areas and far-flung corners of the world, where information scarcity is a real issue, satellite technology can be the one of the few options available to assess project viability.

Even governments in India and Guyana, for instance, are now using satellite technologies to stop illegal mining and check unlawful transport of minerals.

[1] See Dominic Barton and David Court, “Making advanced analytics work for you,” Harvard Business Review, October 2012, Volume 90, Number 10, pp. 78–83.

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