How hedge funds are using satellite images to beat Wall Street

Featuring:

  • Panos N. Patatoukas
    Associate Professor | The L.H. Penney Chair in Accounting | Distinguished Teaching Fellow

While Assoc. Prof. Panos Patatoukas was discussing Walmart in his Financial Information Analysis course last year, a student brought up the story of how company founder Sam Walton used to count cars in store parking lots to gauge how sales were going.

Patatoukas knew that sophisticated investors had begun doing exactly that on a large-scale basis by analyzing satellite images of retailers’ parking lots, and he began to wonder just how much of an edge it was giving them. So, he called up the company that pioneered satellite-image car counting and pitched the CEO on the idea of letting an academic analyze the data. With the help of funding from the Fisher Center for Business Analytics, he landed 4.8 million images of parking lots at 67,000 individual stores across the U.S. owned by 44 major retailers, including Walmart.

“What we found is that it’s a gain for large sophisticated investors who can afford the substantial costs of acquiring and processing big alternative data at the expense of Main Street investors,” Patatoukas said. “If it was just a transfer of wealth between hedge funds, that would be a different story, but it’s small individual investors who tend to be on the other side of the trade.”

His working paper—co-authored by Berkeley Haas Assoc. Prof. Zsolt Katona, Marcus Painter of the University of Kentucky, and Berkeley Haas doctoral student Jieyin Zeng—raises questions about individual investor protections in an age of new “alternative data” sources. Even as technology has made trading more accessible to the masses, the rise of big data is creating so-called alternative data that only those with superior resources are tapping into.

The research is the first independent analysis that shows just how profitable this trading strategy has been: Skilled traders can beat the market by up to 4.4%—a huge gain. However, Patatoukas found evidence that this comes at the direct expense of individual investors.

Click below to read the full release.

Panos N. Patatoukas is a tenured Associate Professor and the L. H. Penney Chair in Accounting at Berkeley-Haas. He is an expert in the areas of micro and macro interdisciplinary capital markets research.

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