How to Build an Investment Strategy in 2020?

1. How to Build an Investment Strategy in 2020 Aikido Finance is delighted to announce the launch of our Premium Investment  Strategies, and they’re ​free ​for all Aikido early access users! Returning 15-20% per year, these long term investment strategies have outperformed the market,             at lower risk over the past 20+ years.                                    At a high level, a quantitative strategy is a set of filters which are applied to a                   database so that it selects a number of stocks to invest in. A “good” strategy               is one which  provides a historically high return, at a low risk.                                    Building a ​best investment strategy​ follows a simple approach:    Step 1 – Universe Selection     

2. We choose stocks from specific countries, markets, industries or size  categories (market capitalisation). For example – US, large cap stocks.    Step 2 – Static Filters        Next we add our static filters to the remaining stocks. We can choose any  metric from any of the high level factors.    For example select stocks with a Return on Equity greater than 30% and  select with a Price-to-Earnings of less than 5.    At this point we could be down to just 200-300 stocks, depending on how  broad the filters are in the previous step.    Step 3 – Ranking 

3.     Next we apply a ranking/ordering to the remaining stocks. Again, we can pick             any metric here. The ranking operator has a big effect on the performance of a             strategy as it can be the attribute by which most weight is given.                                    For example, we can rank our stocks by their descending 6 month price  momentum, ie. those with the largest stock price increase over the past 6  months.    Step 4 – Choose Portfolio Size     

4.   The number of stocks in a portfolio can also have a big impact on the  performance of the portfolio. A more concentrated portfolio of 5-10 stocks  will likely produce higher  returns but with greater volatility. We usually like a portfolio with 20-25 companies  in it.    Et voilà, you have created a quantitative strategy which picks undervalued,  high quality stocks with high momentum.    Premium Strategies  Our premium strategies take a slightly different approach to the filtration  process. The Aikido Team has been busy innovating on our strategy curation  process, and the results are spectacular. We’ve read the research and  incorporated new features into our application, based on our findings. Our  premium strategies utilise a new stock selection flow which reduce risk while  improving return.    Sequential Ranking  An issue we discovered during our research is that static filters do not  account for certain changes in the economy and therefore changes in the  underlying fundamental data of each stock. For example, filtering for stocks  with a price / earnings ratio less  than 10 gives a very different result now than it did in 2008. We looked for a  more dynamic approach to solve this problem. Our premium strategies can  now apply a sequential filtering process. This filtering process allows us to  build a dynamic factor model using multiple metrics. The sequence by which  the metrics are used, determines the concentration and exposure of each  metric in the final portfolio.      Our new approach allows us to rank and filter stocks multiple times in one strategy.  Take for example our Sequential Factor Blend strategy. First, we select the top 

5. 100 most efficient stocks, measured by Return on Equity. Then, we take the  top 50 of these stocks, ranked by ascending Price / Earnings ratio. Finally,  these stocks are ranked by 

6. their 3-month price momentum, and the top 10 are chosen. This strategy has  average annual returns of 14.62% per year, backtested since 2000.    Trend Follower    We have included a new feature called the Trend Follower. The trend follower is  based on research conducted by Gary Antonacci into ​Dual Momentum​. It is an  indicator which provides a Buy/Sell signal during the rebalance process,  depending on the momentum of the underlying benchmark. An example trend  follower would check if the S&P 500 is positive, if so, rebalance as usual,  otherwise sell your positions and hold cash. The trend follower greatly reduces  volatility as it prevents users from holding stocks during downturns in the  market. Take a look at a comparison between two premium strategies:  Smart Quality & Top Quality and High Momentum. The performance of each is  impressive, but the inclusion of the trend follower in the Smart Quality strategy  improves the risk adjusted returns, volatility and max drawdown for just a small  reduction in the average annual return.