Journal of Systematic Investing

Transfer Ranking in Finance: Applications to Cross-Sectional Momentum with Data Scarcity

2022-08-25T08:28:15-07:00

Modern cross-sectional strategies incorporating sophisticated neural architectures outperform their traditional counterparts when applied to mature assets with long histories. However, deploying them on instruments with limited samples generally produces over-fitted models with degraded performance. In this paper, we introduce Fused Encoder Networks -- a hybrid parameter-sharing transfer ranking model which fuses information extracted using an encoder-attention module from a source dataset with a similar but separate module operating on a smaller target dataset of interest. This mitigates the issue of models with poor generalisability. Additionally, the self-attention mechanism enables interactions among instruments to be accounted for, both at the loss-level during model training and at inference time. Focusing on momentum applied to the top ten cryptocurrencies by market capitalisation as a demonstrative use-case, our model outperforms state-of-the-art benchmarks on most measures and significantly boosts the Sharpe ratio. It continues outperforming baselines even after accounting for the high transaction costs associated with trading cryptocurrencies.

An Integrated Approach to Currency Factor Investing

2022-03-14T15:11:19-07:00

Using the G10 universe of currencies, we evidence that parametric portfolio policies can help guide an optimal currency strategy when tilting towards cross-sectional factor characteristics. While currency carry serves as the main return generator in this tilting strategy, the two characteristics momentum and value are implicit diversiers to potentially balance the downside of carry investing in flight-to-quality shifts of FX investors. Drawing insights from a currency timing strategy according to time series predictors, we further examine the parametric portfolio policy's ability to mitigate the downside of the carry trade by incorporating an explicit currency factor timing element. This integrated approach to currency factor investing outperforms a naive equally weighted benchmark as well as univariate and multivariate parametric portfolio policies.

Incorporating Alternative Risk Premia into Balanced Portfolios: Is there any added value?

2022-07-27T11:19:42-07:00

Evaluating Alternative Risk Premia products as standalone investments is not sufficient to conclude whether these products add value to institutional investors, whose portfolios are largely composed of well-diversified equity and bond allocations, and usually smaller ones to alternative assets. We study whether the inclusion of ARP products adds value to two well-known benchmarks of balanced allocations: the 60/40 world equity/bond portfolio and the Pictet LPP 2015-60 index. Taking a sample of live ARP products from 2016 to May 2021, we find that a systematic allocation to ARP with no equity exposure improves risk-adjusted performance, due to risk reduction, even though it causes a small drag in long-term return. This impact is similar to the one many investors seek in Trend-Following funds or Tail-Hedge products, for which we compare results. The drag in performance disappears if one can dynamically manage the inclusion of ARP into the balanced portfolios, even though market timing ability is at the very least a rare asset.