18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
20,631 Blog Posts

The Problem With My Quant Is Diversification

My Quant is up 15% this year, which is a solid year by any measures. But compared to the SPY it sucks. The reason is simple — bifurcation of stocks occurred several months ago, first punishing high fliers and then certain sectors broke out while others did nothing.

Let’s examine what occurred in November.

I happened to be 20% weighted in GLD — bogged out for 4.3%. That hurt tremendously. Then, as the rules go, I had to buy 2 stocks per sector — which is a normal thing to do. But that only works when markets are actually doing well over a broad spectrum. Markets have diverged wildly and are only showing gains in certain sectors.

I have two Quants to choose from– Growth and Value. For November, I was 100% growth and the raw data was great — up 5.4% vs 3.4% for the SPY. Then I choose two stocks per sector, rated by Sharpe ratio, and build a portfolio. That’s where the problems occurred.

Here are the returns for my growth Quant per sector (raw pool vs my holdings)

Basic Materials: +0.79% / +1.53%
Consumer Goods: +6.94% / +7.6%
Financials: +2.77% /+2.1%
Healthcare: +5.8% / +2.5%
Industrial Goods: +18% (only two stocks in pool) / -0.66%
Services: +1.76% / +4.27%
Tech: +7.1% / +7.77%
Utilities: +8% / +1.8%

As of now, my Quant was only +1.2% for November. Without my gold position, which was implemented as a sort of hedge against markets, I’d be up 3%. If I only bought the highest rated stocks without forcing diversification, my gains would be fucking outrageous. Starting this month, at least for a time, I am going to experiment with buying only the highest rated stocks.

As for the GLD and TLT hedges that fall into place when markets underperform, I am going to eliminate the portion and only put it on when GLD outperforms SPY. As it is now, the trade lingers month to month until the SPY beats GLD for months in a row. I think this strategy is flawed. For now, when GLD and/or TLT beat SPY — there will be an automatic 10% position in the asset and that asset will be maintained the following month only if GLD and/or TLT beat the SPY again.

In short, the way the Quant will be managed now can in fact lead it to being 100% long tech stocks, which might be an err, but the risk will be mitigated by the holding period — which is only 1 month.

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  1. natehois

    Top 13f holdings

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  2. numbersgame

    “In short, the way the Quant will be managed now can in fact lead it to being 100% long tech stock.”

    Fly, you may be a professional trader, but you suck at investemtn management. You are maiking the same mistake that novice investors do. The purpose of diversification is to beat the market during BEAR periods. It is fully expected that a diversified portfolio would underperform during a bull market. You’re chasing and treating your quant fund as a trend-following trading account. How did the Quant do during 2018Q4?

    In fact, here’s how i would judge a long term portfoilo:
    1) -5% or better during 2018Q4
    2) 10% or better during 2019YTD

    If you met those marks, great. If not, then I’d say your portfolio is too risky. You may as well simplify and just go 90% in on SPY if you prefer want that high-risk path.

    The only thing I don’t understand: if there were only 2 stock in the Industrial pool, and you shoose two stocks per sector, why were the two numbers different?

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