Algorithm Performance: 08/22/2022
Performance Rankings
Experimental Sector Neutral: -0.11%
Sector Neutral: -0.35%
Market Neutral: -0.51%
Long Term Portfolio: -0.68%
Base Algorithm: -0.86%
The Market: -0.89%
What Happened And Why?
First the good news: everything we publish beat the market today. Further, the order is what we predict. Our sector-hedgers beat the market-hedger, which beat our bullish system, and our experimental algorithm beat everything. We’re bearish (or at least not optimistic) on the market as a whole this week. I don’t personally mind that our bullish system is lagging, because I don’t expect we’ll be putting money into it in the near future.
But nothing was positive. Regardless of how the market as a whole performs, we would rather make money than lose it. So let’s dive into some of our mistakes today.
Looking at our biggest sources of loss, I can see a few repeat offenders - INTC, HOLX, and AEP are the first ones I notice. Let’s take a look.
INTC hit its 52-week low today. So, great day to be putting money into it. Reading some news, one of the main things analysts cite is tech selling off as a whole, but that’s not the whole story. Historically, INTC has a beta to the tech sector of about 0.57. But today the tech sector fell 1.4% intraday, but INTC closed down 3.3% from open. The market was bearish on tech, but it was more bearish here. This is why even our sector hedgers lost money trading it. We’re in the middle of the Hot Chips conference where INTC has given 5 presentations today and yesterday. I suppose the lesson here could be: don’t exclusively use technical signals to trade a company in the middle of a major industry-wide conference.
HOLX seems like more of a modeling failure to me. It fell 1.6% intraday. Bad, but not terrible. Its large losses are a problem of allocation. Our Base Algorithm put about 1% of its portfolio into it. In contrast, Market Neutral and Sector Neutral put roughly 6% and 9% of their portfolios into it. Our Experimental Sector Neutral system (using similar modeling to the base) didn’t touch it. The hedging helped to mitigate that loss. With market hedging, HOLX was only down 0.99%, and with sector hedging 0.91%. Our hedging is good, but the weaker modeling on our hedgers came in to haunt them here. As this problem is solved by both of our experimental hedgers here, it bodes well for our future.
AEP, on the other hand, is where hedging saved us. Our Base System and Market Neutral put 11% and about 9% of their portfolios into it, respectively. With no hedging, AEP was down 1.5%. With market hedging, 1.3%. And with sector hedging, 0.7%: more than a 50% reduction in loss. If we look at AEP’s exposures, this will make sense. It has a 1.2 beta to the Utilities sector, but a 0.32 market beta. Its sector, rather than the market as a whole, has most of the control over it.
HOLX and INTC were the most preventable losses our systems took today. INTC we could have avoided by factoring in the Hot Chips conference, and HOLX by only utilizing an experimental system today. In the future, I want to have a team that audits the short term news around our tickers (though this is probably a ways off). After more testing, I expect our experimental systems to perform superior to our regular hedgers. We’re already using them more often on the pilot account.
Tomorrow’s Outlook
The full algorithm reports will be published tomorrow morning, once Allen has had a chance to vet its recommendations. In the meantime, here are our tentative exposures for the trading day tomorrow:
Note that the color coding has changed to accommodate the addition of our new Experimental Market Neutral system.
That’s all for tonight. Congrats to everyone who made money today. Let’s hope the market turns tomorrow.
-Asher
