2. Summary
• Fully systematic strategy based on scoring algorithm to
assemble stocks for long and short portfolios
• Short only-part of the portfolio substantially reduces
drawdowns during turbulent times.
• Regime switching indicator to switch on and off short
component.
• Two independently profitable substrategies, to get the
final more robust portfolio.
• Simulated performance from 1996 of
• CAGR: 30%
• Sharpe: 1.71
3. Alpha Generation
• Long-only part of the portfolio generates 22% vs SPX
generates 7.59%
• Short only part of the portfolio generates 8.6% vs
benchmark of 1.13%
• Combining long and short reduces drawdowns and
achieves the total performance of 30% with Sharpe 1.71
4. Alpha Generation
Portfolio Components CAGR,
%
Bench Excess
Return
Sharpe MaxDD,
%
Long Only Part 21.94 7.59 14.35 1.11 45.41
Short Only with RS 8.6 1.13 7.47 0.59 32.46
Short Only Part
without RS(zero costs)
-2 -7.59 5.59 -0.1 62
Final Portfolio 30.55 7.59 22.96 1.71 24.9
8. Sentiment indicator summary
• Using Sentiment Indicator to Open/Close short only portfolio
depending on the market sentiment
• Calculating the composite index from:
• VIX Index, Put-Call ratio, NYSE Margin Debt, NYSE Volume , AAII
sentiment, Dividend Premium, Closed-end funds premium, first-year
IPO return.
• Controlling for the economic cycle by regressing the index to
macro data:
• Industrial production; Consumer consumption – non-durables,
durables, services; Payments; Utility rate.
• Use the residuals from the regressions to determine sentiment
phase of market as:
• “BEAR”
• “BULL”
This indicator allows to increase the annual performance of the
short only portfolio from -5% to 8%
9. Testing the strategy on historical data
• Analyzing about 3000 companies at any point in time
• Using the historical data from S&P Capital IQ (Compustat DB)
• No survivorship bias
• Point-in-time data: fundamental and macro data as they were seen on
any particular date
• Quarterly financial data from 1990
• Standardized data
• Weekly rebalancing
• Equal weighted portfolio with max. weight 7% per position
• Conservative commission of 0.2%
• Borrowing costs: 5%
• Sentiment Indicator for Regime Switching
• Using official data from FRED
• Trailing 5-years window
10. Strategy Details: Score Calculations
• Create composite value score as sum of four individual scores
• derived from fundamentals: profitability, growth, safety, payout,
• using about 40 corporate fundamentals from standardized reports
• filter out the companies with capitalization less then median.
• Long Only Portfolio
• Pick up companies with the highest overall composite score and
lowest P/B
• Short-Only Portfolio
• Pick up companies with the lowest individual scores and highest P/B
for short-side portfolio
• Move to cash depending on the current market regime
For each company in the asset universe we derive a score which
defines its position relative to the others.
13. Market Cap Distributions:
largest 100 mcap steps 14%
20%
34%
24%
8%
Long
26%
32%
25%
14%
3%
Short
17%
24%
31%
21%
7%
Total Portfolio
1-5
6-10
11-15
16-20
21-25
Current possible lowest cap at 1.6 bln