Overview
A stock's price is not set by rational investors applying discounted cash flow analysis, but by emotional individuals who each looks at the same stock from a different angle. Prices move up when demand for a stock exceeds supply, and vice versa. If we can predict how investors will move in and out of a stock, we can predict where that stock is headed.
This strategy uses machine learning to analyze varied types of data to take in the perspective of disparate groups of investors. It combines these perspectives, calculating the likelihood that each stock will outperform the benchmark, and forms portfolios using those most likely to outperform. It then layers in some risk management techniques to protect the portfolio from extreme events.
Sources of Alpha
This strategy combines the following types of data to score each stock.
- Reported fundamentals and ratios
- Forecasted fundamentals
- Technical indicators
- Machine learning models based on price histories
- Quantitative factors
Weights given to each type of data evolves over time, to adapt to changing market conditions.
Portfolio Composition
- Uses proprietary algorithm to assign each stock's weighting
- 200 long positions in individual global equities
- Filters out equities with less than $1 million in average daily trading volume
- Sector & geography constrained to match the global index composition
- Shorts S&P 500 and EAFE indices with combined value equalling long positions'
- Rebalanced biweekly
- 100% invested
- No leverage
Risk Management
- Circuit breaker triggers if loss exceeds 99.9% of value at risk, selling all positions and sitting on cash for 1 week
- Stop losses set at levels tailored to each stock's volatility
- Portfolio scaled back to be underleveraged during market turbulence, keeping the portfolio's volatility below a set threshold
Correlations to Popular Factors
- Price to Book: -0.2
- 12 Month Momentum: -0.1
- Size: 0.3
- Profitability: 0.2
- Investment: -0.3
- Defensive: -0.1
- Quality: -0.1
*More info available upon request.