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Are Drones A Legitimate Source of Alpha?


By Tony Fong, Author at Quandl Blog

With predictions claiming that the global UAV drones market could reach up to USD 127 billion by 2020, it is clear that the drones industry is tapping into the world’s demand for more data—at faster speeds and greater precision. While many still associate drone technology with the military market, which indeed accounted for almost three-quarters of the US market total in 2015, demand for commercial drone technology has been slowly catching up in the last decade, with a predicted market size of USD 1.05 billion by 2020 and expected growth at a CAGR of 57%.1

Established and Emerging Markets

The agriculture sector is by far the largest contributor to the recent surge in the commercial drones market, making up 76% of the revenue generated by the commercial UAV industry in 2015. In precision farming, UAVs assist by apportioning pesticides and fertilizers to only areas that require them, resulting in significant cost savings. Technavio’s market research study adds that in agriculture, “a $300 UAV can be used to check for disease and irrigation needs, while the same task performed with manned aircraft will cost at least $1,000 per hour.”2

The insurance industry is one of the latest markets to tap into the potential of drone aerial data collection. According to Cognizant, UAVs can improve productivity by up to 50%, by helping adjustors assess damage in difficult to reach areas both at the time of binding the account and after a claim is made.

Technological Advancements

Compared to satellite technology, which has been amassing valuable data for at least half a century, modern drones have been on the aerial data collection scene for only about two decades. Indeed, prior to 2005, the Federal Aviation Administration (FAA) barely differentiated between drones and model aircrafts flown by hobbyists.

But in the last several years the FAA has come a long way, developing sensible regulations that will make way for more widespread industry adoption of UAVs. This according to Murray Wu, CEO of Reforges, a Toronto-based startup offering drone fleets for hire to commercial businesses.

Much as the boom in satellite technology has provided stakeholders with actionable data insights, drones appear poised to do the same.

Unlike satellites, however, which can be finicky, limited by slow imagery refresh rates, (and expensive to purchase, maintain, and upgrade) drones are able to capture data in non-ideal conditions, such as through rain, clouds, darkness, or even concrete walls. They are versatile, modular, and relatively inexpensive compared to other aircraft, unmanned and otherwise.

This is not to say that drones will replace satellites altogether. In many ways, UAVs can be described as micro-satellites, collecting data on a smaller scale and with greater agility. Many strategies still benefit from the macro-perspective that satellite data provides.

Some also point to the flaws in current drone technology – especially as they relate to accurate data gathering. Jonathan Rupprecht is a lawyer who specializes in drones, and a pilot. He authored Drones: Their Many Civilian Uses and the U.S. Laws Surrounding Them. He says that the drone industry needs to communicate more with the aviation industry, because they have figured out things

like aerodynamic efficiency, which would mean better flight times for drones, and GPS, which would reduce drone “fly-aways” due to errant GPS signals. Rupprecht also points out that drones use LIDAR, a laser range finder that doesn’t have “very accurate or calibrated inertia measuring units (IMU) to measure changes in movement.” This can be somewhat addressed by using cameras, but the concern remains that investors could be trading on inaccurate data.

Still, commodities traders like Anurag Bhatia from Minance Capital claim to already be using drones to predict agricultural commodity prices such as wheat, cotton, sugar and maize. It’s undoubtedly early, but where there’s a will, there’s a way.

From Hardware to Software

The drone market can be broken into four major product types: 1) the UAV itself, which includes large and small fixed-wing aircrafts, rotorcrafts, hybrid and other vehicle methods of lift, such as lighter-than-air; 2) payloads, such as cameras and other sensors, as well as other separately sold parts; 3) ground stations and controls; and 4) software/data analytics, which focuses on the collection, storage, and processing of data. It is this last category, of course, that holds promise for alpha generation.

Today, more and more companies are moving to the data processing end of the industry, introducing software to help operators process and manage the data that drones collect. Ciara Bracken-Roche, a PhD candidate at Queen’s University and a researcher in drone technologies and data collection, describes the shift: “Ten years ago, the main focus of many UAV developers and operators was to get the technology to where it needed to be: trying to reduce the size of the UAV; improving the payload; and making drones more autonomous with capabilities like sense-and-avoid. In the last couple of years, there has been a move towards data collection and analytics optimization.” Here are several key players that have been making an impact in the world of UAV data analytics:

Sky-Futures

The UK-based Sky-Futures was one of the first drone firms to receive money from Airware’s Commercial Drone Fund. Sky-Futures focuses on oil and gas inspection services (onshore and offshore) and its cloud application, the Sky Futures Inspection Portal, hosts the HD video, still and thermal imagery that its drones produce during inspections.

RedBird

The France-based RedBird, a pioneer in drone data analytics for mining, quarrying, and construction industries was founded in 2013. Its cloud platform Cardinal, optimizes resources and ensures safety. Like Sky-Futures, RedBird was one of the first recipients of Airware’s Commercial Drone Fund. In FY2014-2015, the company received $3.19 million funding from three different investors and partnered with Caterpillar, a leading manufacturer of construction and mining equipment.

In September 2016, Airware announced the acquisition of Redbird. “Construction and excavation sites … must be managed and operated digitally in order to compete in today’s markets. Commercial drone technology brings these operations into the digital world while offering faster, cheaper and higher-quality data and analytics,” said Jonathan Downey, founder & CEO of Airware. “By … incorporating Redbird’s powerful analytics tools on top of the Airware platform, we are helping enterprises make this transition into the digital age.”

Gamaya

Gamaya, a Swiss data analytics startup that currently focuses on the soybean, corn, and sugarcane industries, recently raised $3.2 million in a Series A financing round, with the lofty goal of mitigating food scarcity through sustainable agricultural processes. The investors that participated in the round include chairman and former CEO of Nestlé, Peter Brabeck-Letmathe; the Sandoz Foundation; and VI Partners, a venture capital firm.

Gamaya uses its patented hyperspectral imaging for precision farming applications. The data captured by its drones includes alerts for disease, pests, and yield predictions. The imaging technology is so sophisticated that it can detect what is invisible to the human eye and then translate the data into action maps and recommendations for farmers. “Our future is dependent on whether we will be able to leverage technology and innovation in order to dramatically improve the efficiency of our food production methodology,” says Gamaya CEO Yosef Akhtman. “Our solution helps to increase production efficiency by providing farmers with full situational awareness of their farmland and crops.”

Kespry

Kespry, a Silicon Valley startup, builds commercial drone systems that allow its clients to capture, view, and analyze aerial imagery and survey data. The company recently partnered with NVIDIA on a deep-learning module to advance its drone system’s autonomous features. With the resulting Jetson TX1 supercomputing module, Kespry’s drone systems can now analyze data in real time. In June 2016, Kespry announced the close of a Series B equity-financing round of $16 million.

Drone Data as a Source of Alpha: It’s Early

The sky really is the limit when it comes to the potential for drone data usage. There is no telling what industry UAVs will revolutionize next. Consequently, it is no surprise to hear that there is a lot of interest in the idea of selling data to investors and hedge funds. One of Reforges’s investors, for instance, is a subsidiary of a big financial institution that is looking to eventually sell drone data to capital markets. Many drone manufacturers jump at the idea of monetizing the data captured by their UAVs. If there’s a market for their data, why not sell it?

Companies like Kespry, however, are not so sure. “The industry is still at an embryonic stage,” remarks VP Marketing at Kespry, David Shearer, “Our focus is more on providing our clients with what they want: a vertically integrated service that focuses on field to finish.” Many UAV data companies worry that the selling of data could compromise the trust and relationship that is necessary for the client-building phase.

Ultimately, there is no real consensus on who owns the data that UAVs collect: the clients who commission the data or the drone companies who collect it or the property owners whose area is being observed. Lawyer Rupprecht points out that the laws for data collection differ by state. In Florida, for example, you could get sued for flying a drone over a private property and gathering data that could not have been observed on the ground at eye level. So much for orange futures.

Consequently, if drone companies want to sell the data that they have collected on behalf of their clients, they may have to reserve the rights during the initial negotiation phase. For example, a UAV company could theoretically offer its clients a discount on their services in exchange for proprietary rights. (AgTech companies are doing this too: Farmobile offers “profit-sharing” to customers whose data gets resold). According to Ian Glenn, Founder and CEO/CTO of ING Robotic Aviation Inc., “This could save the client money and provide the UAV company with more flexibility.”

Tammer has said in the past: we’re already sharing our data every time we log in to Google. The advertising economy is based on this premise. Drones are collecting valuable data – we know that. And they offer significant benefits over other earth observation techniques. But like AgTech, it will be difficult to leverage the data until a paradigm shift occurs in data sharing practices.

 

1 Technavio, Global Commercial-Purpose Drones Market: 2015-2019, 5.

2 Technavio, Global Commercial-Purpose Drones Market: 2015-2019, 30.

 

 

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We believe that data is one of the most important resources of the 21st century. It is ubiquitous. Data now arises from virtually everything humans and businesses do, every minute of every day. But how much of it has tangible value to capital markets? That is what we ask ourselves every day.

We want to inspire customers to make new discoveries and incorporate them into trading strategies. We find opportunities in places people otherwise wouldn’t think about. We believe there are new and better ways to understand the complex information that creates markets and market movement.

Quandl’s diverse team members have backgrounds in finance, technology, data science and astrophysics, just to name a few. Our team is purpose-built to extract signal from a world increasingly full of noise. We uncover valuable data that is difficult to find, shape it and share it with our clients.

We believe that data, and alternative data in particular, is going to become the primary driver of active investment performance over the next decade.

 

 

This article is from Quandl and is being posted with Quandl’s permission. The views expressed in this article are solely those of the author and/or Quandl and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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