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Saturday, 27 August 2022

Can a simple quant system outperform the market?


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A Simple Trend Following Quant System
I was teaching basic quant to a friend. My effort was to focus on explaining how reasonable returns could be had from investing in a systematic strategy with less churn and low headache 😀

So, what I did was I tried a very basic system. Mark Minervini suggested this combination of moving averages in his book. The idea here is to look for stocks whose current market price was greater than the 50-day exponential moving average (ema), the 50-day ema should be greater than the 100-day ema and that should be greater than the 200-day ema. The strategy then selects the top 20 stocks filtered by specific filter criteria. I tested it with 4 different options - RSI, ADX (both technical indicators), QoQ EPS growth (fundamental indicator) and our own proprietary indicator which we have developed in-house at Intelsense.

Additional work is needed to reduce the max drawdown (if required) but we need to keep in mind any efforts to reduce maxDD also reduce the return CAGR.

The results are superb. The return CAGR varied from 40% to 56% over 14.3 yrs (before costs and taxes, for which you should deduct around 6-8% since this is a quarterly strategy).

The bottom line is that if you can stick to a mechanical strategy there is a lot of returns to be made over the long term.

This is primarily a technical system wherein most of the screening parameters are technical in nature. I will be sharing similar fundamental and technofunda strategies in the future which will hopefully be able to showcase why more and more capital globally is moving away from discretionary investing to systematic investing.
Strategy Results
Strategy Results

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