My introduction to the subject was when one of my mentors tasked me with counting tractor-trailers pulling up to the loading dock of a company he was considering buying.From Nanalyze:
After three days I asked if this was the highest use of my time and was "promoted" to scouring help-wanted ads to see who was growing enough to be hiring.
For our younger readers, help-wanted (or position available) ads were a type of classified advertising found in newspapers.
Newspapers were a medium of communication that....
One important thing you learn during your MBA is that your newly acquired ability to conjure up value from nothing is referred to by the finance community as “the ability to generate alpha.” Loosely speaking, generating alpha means putting money into the markets and getting back more than if you would have simply invested in a broader market benchmark. Some finance theories like the efficient market hypothesis propose that the only way to generate alpha is by acquiring superior information because all commonly known information is already priced into the market.
Consequently, investors – particularly hedge funds – are always looking for new sources of information so they can generate super-sized returns. With an ever-increasing number of satellites in space now, there is loads of new imagery of the earth’s surface that can be mined for useful insights. One firm we’ve talked about before, RS Metrics, is Using Satellites to Forecast Metals and Commodity Prices in some very innovative ways.
The old “count the cars in the mall parking lot to forecast retail sales” use case is no longer unique. Anyone with some basic machine learning algorithms can now obtain satellite imagery and do the exact same thing. “The technology isn’t where the real value lies today,” said Maneesh Sagar, CEO and Chairman of RS Metrics, “it’s in having business-savvy data science teams that can extract a broader set of insights from the imagery.” We sat down with Mr. Sagar to discuss six interesting ways that his clients are using insights from satellite imagery data to generate alpha.
Camp Fire Disaster
We’ve talked before about how How Technology Will Affect Big Insurance Companies and gave examples of how satellite imagery can be used to assess things like hail damage. When something unexpected happens like a natural disaster, questions are immediately raised around who is liable and what they’re liable for. A large-scale disaster like a forest fire can destroy thousands of homes and insurance companies need to know – as quickly as possible – what they’re on the hook for.
Take for example the Camp Fire in 2018 which was California’s deadliest forest fire and one of the deadliest fires to ever traverse our planet affecting 18,265 parcels of land. Using satellite imagery, RS Metrics was able to then combine additional data sources such as property boundaries and county tax values to quickly assess the number of homes damaged and the extent of the damage.
Cross-referencing home plots with tax assessment data – Source: RS Metrics
This process allowed them to quickly tally up estimates of damages that could then be used to determine the extent to which insurance companies would be held liable. Oftentimes when a disaster like this one occurs, publicly-traded insurance companies will be immediately penalized by the market – across the board – allowing for savvy traders to purchase companies that were marginally affected at discounted prices. The same holds true in our next example which also relates to a fire.
Supply Chain Disruptions
Computing is so widespread that computing components like DRAM are now a commodity. This means that the prices of DRAM can fluctuate dramatically based on the forces of supply and demand. When the world’s second-largest manufacturer of DRAM – Korea’s SK Hynix (000660:KS) – had a fire in their factory on September 4th, 2013, the price of a benchmark DRAM chip rose from $1.60 to $2.27. This means that other DRAM producers stand to benefit (prices of stocks rise) while Hynix stands to lose (price of stock falls).
For traders, it’s critical to understand how long it takes for Hynix to come back online so that the prices of DRAM fall back to normal. Using satellite imagery, RS Metrics was able to assess the fire damage and monitor the progress of rebuilding the damaged buildings by looking at things like building cranes, waste disposal, and the number of cars in the parking lot which reflected people going back to work....MUCH MORE
Previously:
"How human traders will beat the machines"
"The Rise of the Amateur Oil Sleuths"
"Maersk Tankers invests in quantitative hedge fund CargoMetrics"
UPDATED--I've Tried to Keep an Open Mind But This is Going Too Far: "Analysts Beware! A Machine Has Its Eye On Your Job"
"Wall Street’s 0.01%: The Guru Who Only Talks to Hedge-Fund Elite"
"How satellites, drones, and planes are making hedge funds money"
The Start-up That Watches Corn Grow, From Orbit
Hedge Funds Using Satellites To Track Consumer, Infrastructure and Commodity Trends
"Artificial Intelligence to reveal the biggest secret in oil"
Amazon and the CIA Want to Teach Artificial Intelligence to Watch Us From Space (AMZN; NVDA)
New Orwellian Hedge Fund Watches All The World's Shipping For Billionaires
"The Alternative To Alternative Data For Investment Managers"
Why yes, we do have an interest in this stuff.
