QuantDesk® Machine Learning Forecast

for the Week of September 21

Analysis

BlackDog had a good week ending up 41 bps while the major indexes gave in to a volatile week with a slight drawdown. Tiebreaker ended the week uncharacteristically lower by -1.69%. Since September 1st, 2014 (just short of a year) Tiebreaker contained its max drawdown to -2.14% while enjoying a total return of +22.39% and a Sharpe ratio of 2.85. For the same period, the benchmark (S&P) is down -0.19% bps with a max drawdown of -11.91%. Year-to-date returns are enumerated in the table below.

Image 1: Last week’s change and Year to date gains.

What’s interesting about Tiebreaker is that even when the portfolio’s constituents turn against their projected direction, Tiebreaker maintains several levels of safeguards to minimize the impact. Tiebreaker holds a Beta of 0.11 since 9/1/2014 to date.

Safeguard #1
Use of Lucena’s Portfolio Optimizer: Once the long leg constituents of Tiebreaker are identified, Tiebreaker employs QuantDesk® Portfolio Optimizer. The optimizer incorporates Markowitz’s novel price-winning approach to assessing proper allocation for a target risk. Tiebreaker targets max risk adjusted return.

Image 2: In-sample assessment of QuantDesk® Optimizer when applied on a sample portfolio.

The blue line represents the portfolio before optimization, while the orange line represent the portfolio’s performance based on the recommended allocation. The cone on the right measures projected value and volatility (the wider the cone the higher is the projected volatile).

Safeguard #2
Use of Lucena’s Hedge Finder: The Hedge Finder seeks to identify additional short or long constituents with special anti-correlation characteristics to the long leg.

Image 3: Sample portfolio illustrating before and after hedging (blue and orange lines, respectively).

Safeguard #3
Application of stop loss and max gain. We’ve applied brute force backtesting assessments to identify the optimal target gain and stop loss conditions suitable to reducing risk and containing max drawdown.

In the coming weeks, I will dig a bit deeper and describe how we’ve evolved Tiebreaker to become what it is today. My hope is that this will inspire you, our readers, to take action and overlay quantitative research into your investment routines. The science behind Lucena’s technology may be complex, but the front-end makes it easy to visualize and understand the methodology and reasons for the machine’s recommendations.

For those of you unfamiliar with BlackDog and Tiebreaker, here is a brief overview:
BlackDog and Tiebreaker are two out of an assortment of model strategies that we deploy for our clients. Our team of quants is constantly on the hunt for innovative investment ideas. Lucena’s model portfolios are a byproduct of some of our best research, packaged into consumable model-portfolios. The performance stats and charts presented here are a reflection of live portfolios tracked on our platform, QuantDesk®. Actual performance of our clients’ portfolios may vary as it is subject to the manager’s discretionary implementation. We will be happy to facilitate an introduction to one of our clients for those of you interested in reviewing live brokerage accounts that track our model portfolios.

BlackDog:
BlackDog is a tactical asset allocation strategy that utilizes highly liquid ETFs of large cap and fixed income instruments. The portfolio is adjusted approximately once per month based on Lucena’s Optimizer in conjunction with Lucena’s macroeconomic ensemble voting model. Due to BlackDog’s low volatility (half the market in backtesting) we leveraged it 2X. By exposing twice its original cash assets, we take full advantage of its potential returns while maintaining market-relative low volatility and risk. As evidenced by the chart below, BlackDog 2X is substantially ahead of its benchmark (S&P 500).

BlackDog: Model portfolio performance compared to the S&P 500 from 4/1/2014 to 9/18/2015.
Past performance is no guarantee of future returns.

TieBreaker:
Tiebreaker is an actively managed market-neutral long/short equity strategy. It invests in equities from the S&P 500 and Russell 1000 and is rebalanced weekly using Lucena’s Forecaster and Optimizer. Tiebreaker splits its cash 50/50 between its core and hedge holdings, and its hedge positions consist of long and short equities identified by QuantDesk® Hedge Finder. Tiebreaker has been able to successfully avoid major market drawdowns while still taking full advantage of subsequent run-ups. The main factor that enables Tiebreaker to perform so well is its ability to adjust its long/short exposure based on idiosyncratic volatility and risk. Lucena’s Hedge Finder is primarily responsible for driving this long/short exposure tilt.

Tiebreaker: Model portfolio performance compared to S&P 500 and the Vanguard Market Neutral Institution fund VMNIX from 9/1/2014 to 9/18/2015.
Past performance is no guarantee of future returns.

I designed, backtested and deployed Tiebreaker utilizing QuantDesk® exclusively. This can serve as an example of how a portfolio manager can take full advantage of Lucena’s technology.

In the past year, we covered QuantDesk’s Forecaster, Back-tester, Optimizer, Hedger and our Event Study. In future briefings, we will keep you up-to-date on how our live portfolios are executing. We will also showcase new technologies and capabilities that we intend to deploy and make available through our premium strategies and QuantDesk® our flagship cloud-based software.
My hope is that those of you who will be following us closely will gain a good understanding of Machine Learning techniques in statistical forecasting and will gain expertise in our suite of offerings and services.

Specifically:

  • Forecaster – Pattern recognition price prediction
  • Optimizer – Portfolio allocation based on risk profile
  • Hedger – Hedge positions to reduce volatility and maximize risk adjusted return
  • Event Analyzer – Identify predictable behavior following a meaningful event
  • Back Tester – Assess an investment strategy through a historical test drive before risking capital

Your comments and questions are important to us and help to drive the content of this weekly briefing. I encourage you to continue to send us your feedback, your portfolios for analysis, or any questions you wish for us to showcase in future briefings.
Send your emails to: info@lucenaresearch.com and we will do our best to address each email received.

Please remember: This sample portfolio and the content delivered in this newsletter are for educational purposes only and NOT as the basis for one’s investment strategy. Beyond discounting market impact and not counting transaction costs, there are additional factors that can impact success. Hence, additional professional due diligence and investors’ insights should be considered prior to risking capital.

For those of you who are interested in the spreadsheet with all historical forecasts and results, please email me directly and I will gladly send you the data.

If you have any questions or comments on the above, please do not hesitate to email me directly.

Have a great week!

To conduct your own research on QuantDesk® please use the following links.

On Bloomberg:
APPS QFORE – Forecaster
APPS QOPTIM – Optimizer
APPS QHEDGE – Hedger
APPS QEVENT – Event Analyzer
On The Web:
quantdesk.lucenaresearch.com

About Lucena Research

Lucena Research brings elite technology to hedge funds, investment professionals and wealth advisors. Our Artificial Intelligence decision support technology enables investment professionals to find market opportunities and to reduce risk in their portfolio.

We employ Machine Learning technology to help our customers exploit market opportunities with precision and scientifically validate their investment strategies before risking capital.

Disclaimer Pertaining to Content Delivered & Investment Advice

This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service.

Please note: Lucena is a technology company and not a certified investment advisor. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are of the author and are based on statistical forecasting based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.