Tiebreaker

A Long/Short Active US Equity Strategy

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Market Neutral = Low Volatility

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Weekly Rebalance = Adaptive

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Long/Short = Hedged

What is Tiebreaker?

Tiebreaker is an active investment that uses long and short positions to deliver market neutral returns. Tiebreaker is designed to provide positive returns whether the market goes up or down. Tiebreaker employs Lucena’s Price Forecaster on a qualified list of stocks generated from Lucena’s Event Analyzer in order to rank a handful of stocks most likely to go up over the next week to a month. The strategy then incorporates long/short hedge positions using Lucena’s proprietary hedging algorithm. Tiebreaker may rebalance positions each week, utilizing technology in Lucena’s Portfolio Optimizer.

Tiebreaker Image

The above backtest represents quantitative research and should not be considered as investment advice, or solicitation to buy or sell securities.

Lucena Research is a technology company and everything presented here is derived from quantitative research. The information above is intended for certified investment professionals who understand the inherit risk of investing. It should not be assumed that the above backtest results will be repeatable in the future. Detailed list of securities and the factors used for their selection criteria is available upon request.

Tiebreaker Goals:

  • Market outperformance
  • Low Beta
  • Low Volatility
  • Low Correlation to the market

The backtest was conducted between 1/1/2009 and 9/30/2014.
Rebalanced weekly, our core holds 5 long positions and our hedge is a long/short cobination with 30% allocation and a relative beta of 2.
Benchmark used was S7P 500. As can be seen, the Hedge reduces volatility while still maintaining strong market relative performance.

Our Edge:

  • Adjust its net exposure and tilts towards long/short based on market risk.
  • Utilizes a layered portfolio construction process: Event Analysis, Price & Volatility Forecasting, Hedging & Optimization
  • Frequent Rebalance

How do we pick constituents?

  • Identify positions from QuantDesk’s Event Study bullish scans.
  • Further hone in on the top holdings using QuantDesk Price Forecaster.
  • Optimize the long leg with QuantDesk’s mean-variance optimizer.
  • Use QuantDesk’s Hedge Finder to identify long or short anti-correlated constituents to preserve the return of the long leg, but with lower volatility.

Execution

  • Positions are held for one week (five trading days) or until exit conditions are met.
  • Entry and exits are executed through market, Volume-weighted-average-price (VWAP) and Market-on-close (MOC) orders.
  • All open positions are controlled by order-cancels-order (OCO) exit conditions, trailing stop loss and target gains.

Strengths

  • Low correlation to the market
  • Highly liquid constituents
  • Active and agile, with timely responses to changes in market sentiment
  • Machine learning optimized for maximum return/minimum volatility
  • Quantitatively-driven, self adjusts to market and stock-specific technical, fundamental and other conditions

Risks:

  • Exogenous risk or black swan event affecting equity markets
  • Stock-specific liquidity risk causing gaps beyond stop loss
  • Protracted high-volatility, down trend equity environment
  • Inability to borrow (short) certain stocks
  • Transaction costs: High turnover and exposure to dividend and interest-owed on short positions

Risk Mitigation:

  • Enforce maximum position size per equity
  • Trailing stop loss (GTC) placed on every open position
  • Realize return early and protect from sudden moves via order-cancel-Order (OCO) on each position
  • Unique hedging algorithm finds optimal offset for long positions
  • Profitable positions are left in cash, exposure reduced
  • Directional tilts are allowed but reassessed every week
  • Entry via VWAP during active trading hours to provide acceptable depth for trades
  • Exit at close (MOC) reduces slippage and adds liquidity
  • Deep discount brokerage mitigates drag of high-turnover
  • All statistics based on non-levered account
  • Highly liquid large caps and mega caps with low slippage and easy to short.

Disclaimer: 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. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are based on statistical forecasting which is 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.