QuantDesk® Machine Learning Forecast
for the Week of June 20
Financial discussions were all centered around risk aversion in the face of a growing sentiment in favor of “Brexit,” a referendum set to decide whether the United Kingdom should leave the European Union (EU). The VIX exhibited wild swings to end the week higher by approximately 20%. This, along with sovereign bonds dropping to new lows (some in negative territory), shows there is certainly uneasiness in the market. From a quantitative analysis perspective, assessing a unique circumstance such as “Brexit” cannot provide the statistical significance one needs to determine a likely outcome, not to mention its short and long term impact on world markets. Given the relatively short term uncertainty, some active investors elect to reduce risk and take some money off the table. Some look at the US as a safe haven for short term investment vehicles such as CDs (Certificate of Deposits), government backed treasuries, or money market funds.
Image 1: VIX 1-week chart - Source Google Finance
Past performance is no guarantee of future returns.
Analysis
Global equities slipped lower in a volatile trading week and the US market was no exception, as the major indexes ended lower by more than 1%. BlackDog and Tiebreaker followed suit, although Tiebreaker contained its downdraft to about half of the benchmark.
BlackDog dropped by 1.34%, still maintaining a year-to-date return of 7.12% and a trailing 12 month return of 8.12%. Tiebreaker moved lower by -0.67%, holding a trailing 12 month return of 6.80%. (Better than the S&P by approximately 4.3%.) The DOW and the S&P both ended lower, losing 1.23% and 1.69% respectively.
- DIA lost -1.23% (SPDR Dow ETF)
- SPY lost -1.69% (SPDR SP-500 ETF)
- Tiebreaker model portfolio lost -0.67% and currently stands at a YTD return of 0.71%.
- BlackDog 2X model portfolio lost 1.34%, holding a YTD gain of 7.12% and ahead of the SPY by 4.73%.
The table below delineates a YTD comparison between the two model strategies we cover in this newsletter (BlackDog and Tiebreaker) and the two ETFs representing the major US indexes (the DOW and the S&P).
Image 2: Last week’s changes, trailing 12 moths, and year-to-date gains/losses.
Past performance is no guarantee of future returns.
Update on QuantDesk® - Lucena’s Flagship Cloud Product
Our development team never stands still. In tandem with developing new and exciting strategies, we keep enhancing our platform. We have recently added a few features worth noting:
QuantDesk Backtester
For those of you unfamiliar with QuantDesk, here is a brief background. QuantDesk is Lucena’s flagship cloud product. It allows a non-quant to take advantage of our technology through a web browser featuring a highly visual and actionable interface. A portfolio manager can easily construct a portfolio or assess an existing portfolio by applying one or more of our quantitative analysis disciplines. For example, you can identify new constituents for your portfolio based on our Event Analyzer signals or our Price Forecaster. You can also optimize or hedge your portfolio with a simple interface. What’s truly unique about QuantDesk is that it provides many of the capabilities of an in-house quant with less effort, faster response, and for a fraction of the cost.
Over the past three years or so, we have followed best practices in applying big-data analytics through machine learning for investment and incorporated them into QuantDesk. One of QuantDesk’s unique capabilities is our Backtester. QuantDesk Backtester allows you can take an investment idea and backtest its efficacy over time through a point-and-click interface. In other words, you don’t need to know how to code or be a database expert to gain insights into what was traditionally available only to portfolio managers within large and sophisticated hedge funds.
Here is how you backtest a strategy:
You start by defining the strategy you wish to backtest:
Step 1
General information such as your starting cash, the benchmark you will compare against, transactions cost, or the period of time you wish to simulate
Step 2
Then you can set the investment process you wish to assess. In this particular example we are testing a portfolio responding to an event signal. We assert how many constituents we purchase and their allocation, how long we should hold on to them, whether or not there are early exit conditions.
You can monitor the backtest as its running over time and when the assessment complete, the backtest results displayed in summary format on your screen. You can obtain a more comprehensive performance report by pressing the “Performance Report” button.
Image 3: Backtest results summary screen.
Past performance does not guarantee future returns.
We have recently added the following new features which will be deployed to production in the coming weeks:
- You can now convert any backtest to a live paper trading portfolio with a simple push of a button. In other words, you are now able to forward test, completely out-of-sample, a successful backtest.
- We also added a new feature by which you can stitch together two periods (in-sample and out-of-sample) and allow the backtest to assess the cross over performance. Cross validation analysis asserts if the characteristics of out-of-sample performance lay within the bounds of expectations set by the in-sample backtest.
Image 4: Performance report dashboard of both in-sample and out-of-sample simulation.
Past performance is no guarantee of future returns.
Image 5: Cross-validation, in-sample vs. out-of-sample performance analysis. Orange represents out-of-sample performance.
The top portion exemplifies the expected price velocity bounds and whether the out-of-sample performance is within expectation.
The bottom part represents a daily return distribution comparison between in-sample and out-of-sample relative to their respective means.
Past performance does not guarantee future returns.
In the coming weeks, I will be sharing additional new features we’ve recently added to QuantDesk.
Model Tiebreaker: Lucena’s Active Long/Short US Equities Strategy:
Tiebreaker: Paper Trading model portfolio performance compared to the SPY from 9/1/2014 to 6/17/2016.
Past performance is no guarantee of future returns.
Model BlackDog 2X, Lucena’s Tactical Asset Allocation Strategy:
BlackDog 2X: Model portfolio performance compared to the SPY and AQR’s risk parity fund Class I, from 4/1/2014 to 6/17/2016.
Past performance is no guarantee of future returns.
Appendix
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 offer 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 paper traded portfolios on our platform, QuantDesk®. Actual performance of our clients’ portfolios may vary as it is subject to slippage and the manager’s discretionary implementation. We will be happy to facilitate an introduction with one of our clients for those of you interested in reviewing live brokerage accounts that track our model portfolios.
Tiebreaker:
Tiebreaker is an actively managed long/short equity strategy. It invests in equities from the S&P 500 and Russell 1000 and is rebalanced weekly using Lucena’s Forecaster, Optimizer and Hedger. Tiebreaker splits its cash evenly between its core and hedge holdings, and its hedge positions consist of long and short equities. Tiebreaker has been able to avoid major market drawdowns while still taking full advantage of subsequent run-ups. Tiebreaker is able 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 Live Interactive Brokers Portfolio Performance
Live performance reports are taken from an interactive brokers account which attempts to follow Tiebreaker’s model closely with the following potential differences:
- Transactions Fees - Performance is net of transactions fees.
- Management Fees - Performance is net of management fees.
- Manager’s discretion – Manager can use own discretion as to final trade executions. For example, employing VWAP (volume weighted average price) and/or manually monitoring exit during stop loss and target gain.
- Hard to borrow and restricted stocks - Hard to borrow, and restricted stocks may be substituted with highly correlated alternatives.
- Dividends, interest or any other credits are reinvested.
- Slippage - Depending liquidity, large block purchases could impact certain stock prices unfavorably.
Tiebreaker Model Portfolio Performance Calculation Methodology
Tiebreaker’s model portfolio’s performance is a paper trading simulation and it assumes opening account balance of $1,000,000 cash. Tiebreaker started to paper trade on April 28, 2014 as a cash neutral and Bata neutral strategy. However, it was substantially modified to its current dynamic mode on 9/1/2014. Trade execution and return figures assume positions are opened at the 11:00AM EST price quoted by the primary exchange on which the security is traded and unless a stop is triggered, the positions are closed at the 4:00PM EST price quoted by the primary exchange on which the security is traded. In the case of a stop loss, a trailing 5% stop loss is imposed and is measured from the intra-week high (in the case of longs) and low (in the case of shorts). If the stop loss was triggered, an exit from the position 5% below, in the case of longs, and 5% above, in the case of shorts. Tiebreaker assesses the price at which the position is exited with the following modification: prior to March 1st, 2016, at times but not at all times, if, in consultation with a client executing the strategy, it is found that the client received a less favorable price in closing out a position when a stop loss is triggered, the less favorable price is used in determining the exit price. Since March 1st, 2016, all trades are conducted automatically with no modifications based on the guidelines outlined herein. No manual modifications have been made to the gain stop prices. In instances where a position gaps through the trigger price, the initial open gapped trading price is utilized. Transaction costs are calculated as the larger of 6.95 per trade or $0.0035 * number of shares trades.
BlackDog:
BlackDog is a paper trading simulation of 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).
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: [email protected] 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, feel free to contact me: [email protected]
Have a great week!
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.