Factor allocation

The Best Systematic Trading Strategies in 2021: Part 1

16.August 2021

As of the first half of August, the year 2021 seems to be a phenomenal year for equities. World equities have earned more than +16%, and US equities, even more, topping +20% gains. Is there even any better strategy this year than just holding US equities? Well, yes, there are actually several of them. Are they all tied to US equities? Many of them are, but many of them are not. Some of them are not even tied to equities at all.

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Community Alpha of QuantConnect – Part 2: Social Trading Factor Strategies

13.August 2021

This blog post is the continuation of series about Quantconnect´s Alpha market strategies. This part is related to the factor strategies notoriously known from the majority of asset classes.

Overall, the factors on alpha strategies provide insightful results that could be utilized. The results particularly point to excluding the most extreme strategies based on various past distribution’s characteristics.

Stay tuned for the 3rd and 4th part of this series, where we will explore factor meta-strategies built on top of the QuantConnect’s Alpha Market.

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An Important Analysis of Stock Momentum and Reversal Factors

11.August 2021

Can we explain stock momentum by industry, sector or factor momentum? Moreover, a similar question could be raised about the short-term reversal. The novel research by Li and Turkington (2021) uses a robust regression model to divide momentum and reversal returns into the main drivers. The individual momentum anomaly that broader market groups do not fully explain exists in the whole sample but is statistically weak. On the other hand, the reversal anomaly is highly significant. Secondly, the traditional 12-months momentum can be better explained by the factor momentum than the industry or sector momentum. Still, the industries, industry groups, sectors, and even factors have distinct drivers, and the anomalies seem different.

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A Deeper Look into Factor Momentum

8.June 2021

Momentum seems to be present everywhere and based on academic studies, it is even hard to find assets where the anomaly does not work. Among the large number of research papers related to momentum, the discovery of factor momentum is still relatively new. It is a truly important finding in the world of systematic strategies – there seems to be a return continuation among factors. The novel research of Fan et al. (2021) builds on the recent academic research and shows that, after all, the factor momentum might be different. To be more precise, the authors show that looking at the universe of 20 factor strategies, the factor momentum seems to work and can span individual equity momentum strategies (standard momentum, industry momentum and intermediate momentum). However, the factor momentum is mostly driven by only six factor strategies, and the return continuation of the remaining factors is weak. Additionally, those sixteen non-return continuation strategies cannot span the momentum effects mentioned above. Therefore, the results show that the factor momentum works on the aggregate but individually works much better. In fact, the factor momentum return of the six return continuation factor is significantly better compared to the rest or buy-and-hold portfolio. Moreover, the authors have also identified that the “best” factor momentum strategy is the Betting against beta and conclude that the reason is the unique weighting scheme utilized by the factor. The beta weighting assigns a higher weight to smaller companies, where the momentum tends to be stronger. Overall, the research paper is an important extension of the factor momentum literature.

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Crowding in Commodity Factor Strategies

13.April 2021

Nowadays, factor strategies are widely spread and used by practitioners, but this factor boom has given rise to some concerns. A key question is whether these strategies stay profitable once published and if they are not arbitraged away. Some strand of the literature suggests that there is a performance decay. A different view on performance decay is presented in the novel research of Kang et al. (2021), which indicates that the performance might be time-varying. Using the commodity market and premier anomalies such as momentum, basis, and value, the authors suggest a crowding in the factor strategies that predicts future performance. Crowded factors tend to underperform in future, and there is a significantly negative impact on the expected return. Moreover, the most substantial returns are connected with the least crowding activity. Therefore, the results are especially important for active factor traders.

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An Analysis of Volatility Clustering of Equity Factor Strategies

8.April 2021

Volatility clustering is a well-known effect in equity markets. In simple meaning, volatility clustering refers to a tendency of large changes in asset prices to follow large changes and small changes in asset prices to follow small changes. This interesting effect can be sometimes uncovered as one of the reasons for the functionality of some selected trading strategies. For example, low-volatility months in stock indexes (like the S&P 500 Index) are usually also months with higher performance. As volatility tends to cluster, a low volatility month in the present can signal a low volatility month with a better performance also in the future.

Based on this, we will be testing two hypotheses: (1) firstly, if there is a volatility clustering anomaly present in equity factor strategies; (2) secondly, if there is any performance pattern related to volatility.

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