Tactical Allocations using ClearMacro Short-term Investment Ratings

by | Feb 1, 2020

This is a case study demonstrating how Investors integrate their own views with ClearMacro investment frameworks in order to generate alpha.

The Case: Avoiding Hubris While Overweight Chinese Equities.

 

Summary

  1. Performance: Generated 8% net gain and 5% alpha over 6 weeks.
  2. Conviction: Dynamic, linked to framework outputs.
  3. Differentiation: Objective and transparent articulation of conviction which calibrates to allocation sizing. ClearMacro delivers tools for investors to manage external noise and internal biases.
  4. How: By constructing a framework that allocates dynamically to the trade based on the real-time alignment of investor view / ClearMacro short-term investment rating framework, drawing on 30 signals and 100,000+ data points.

 

How is our approach different to the way that investors typically make short-term allocation decisions?

Normally, investors generate tactical ideas by reading research and coming up with their own conclusions, or by adopting fully systematic trading models. Instead, we believe that investors can reconcile their views with those of preferred external frameworks in order to systematically identify conviction and calibrate it to appropriate risk exposure.

ClearMacro provides the frameworks for investors to easily benchmark their own views.

 

Why should investors care?

Without decision-making frameworks, decision quality is very exposed to investors’ own biases.

But frameworks require construction and maintenance, which eats up budgets and management time.  ClearMacro provides an alternative.

Frameworks also require data – there’s a staggering amount of it, and it’s mostly noise.  ClearMacro takes away the onerous job of sourcing, selecting and cleaning the data, and then processing and aggregating it to generate reliable, forward-looking return insights.

 

An Example

In October 2017, Chinese stocks had enjoyed a long rally of almost 30% over the previous 18 months.  Yet, a bullish investor would have remembered the almost 50% fall in the index in H2 2015 and therefore valued an external framework with which to calibrate their exposure. This is where ClearMacro comes in.

ClearMacro’s Short-Term Investment Ratings framework estimates return prospects over the next 6 months for Chinese equities.

ClearMacro’s short-term investment rating for Chinese equities plotted against Chinese stock market

ClearMacro ratings are built from back-tested individual signals linked to specific information categories. These signals are standardised to a 1 to 10 score, indicating maximum negative to maximum positive return prospects. For example, one of these signals comes from one of our private data vendors – Alexandria Technologies – who use Natural Language Processing to evaluate what economic and market sentiment contained in news feeds mean for returns.

The combined insights of Individual ClearMacro signals power short-term investment rating levels

Investment ratings are only semi-systematic – while they are built from these individually back-tested signals, there is no attempt to optimise the signal weights, hence they represent the “average” signal insight across all relevant information sets.

With access to these short-term ratings, the user was able to easily build a framework for integrating their own view with ClearMacro in order to dynamically calibrate their trade exposure.

 

How did this work in practice?

A user who wanted to go long Chinese stocks (based on their own views) on September 28th, 2017, could have benchmarked themselves against ClearMacro’s Short-Term Investment Ratings.  By allocating an equal weight to their own opinions and these ratings, the user could construct a simple 2-input framework to dynamically articulate a trade conviction level that, when combined with the investor’s risk budget, would dynamically drive trade allocation size.

The combination of user views and short-term investment ratings drive trade allocation size as they align / diverge. 

How did it benefit investors?

Using this framework, the user would have realised a net gain of 8% and alpha of 5% over the 6-week holding period (excluding transaction costs).

Performance Tracker: Chinese equity short-term allocation decision

These insights could also have been used at Portfolio Manager or trading book level to dial up their China and / or Emerging Market portfolio risk.

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