+ Does DigiFundManager run on Apple?
Our software runs smoothly on Windows 10. It has been elaborately tested on simple and advanced laptops and desktops. For larger portfolios of more than a hundred stocks, a user will notice the difference in processing time between running the estimation techniques for optimum portfolios on a simple laptop and on the most advanced desktops.
For instance, automatically composing, ranking and weighting portfolios of 1500 long and 1500 matched short positions takes about 30 seconds for a weekly validation over 11 years on an advanced desktop with an Intel i9 extreme edition processor, a pair of 8GB active memory set at 3200MHz, and two high-speed SSD’s configured in RAID0. This processing time increases by a factor of eight to ten when a simple laptop is used.
+ What is the difference between a future prediction and expectations of risks and rewards of investments?
In a similar way, we can quantify with reasonable confidence the expectation values of risks and rewards of optimum portfolios based on past performance from “womb to current” under a given set of some 35 conditions and personal circumstances for stock screening, ranking and weighting. Shouldn’t an investor or trader be legitimately interested in his risks and rewards he can expect from his investment or trading scheme in the future?
We do not know of any program other than ours available to the retail investor that answers this question.
+ Why should I go for CSI as a data provider rather than using free data from the public domain?
As timing is crucial for rebalancing portfolios, one usually cannot afford to be cut off from the current historical data. To minimize potential errors and download uncertainties, we are happy that CSI was willing to work out a customized solution with us aimed to providing Clean historical data for our analyses in secured timely download processes.
CSI may offer more timely price and volume corrections, IPOs (Initial Public Offerings), Splits, and Dividends, and its service may be more reliable, providing free customer support by phone and email. It offers this service directly to our users for a modest yearly subscription fee of $165.
+ Why forward looking in an unpredictable future of the stock market?
The fact remains that the future guidance by experts on fundamentally unpredictable processes may induce relatively short-term market movements that could be exploited in short-term interactive trading strategies.
Our algorithms completely ignore the continuous stream of breaking news and only take the end-of-day historical exchange data of Wall Street as a measure of historical performance. Optimal portfolios by definition can only be selected when risk and reward objectives are satisfied over the long run, irrespective of this continuous stream of breaking news.
DigiFundManager enables a user to screen and rank stocks based on relatively short-term value fluctuations. The program enables a user to group screened and ranked stocks into portfolios and time and weight those portfolio positions based on his long-term investment objectives. It then enables a user to validate the conformance of his investment plan to his investment objectives over 10 - 55 years. To our knowledge, there is no other software program available to the retail investor that enables this validation.
+ Where does DigiFundManager go beyond Modern Portfolio Theory (MPT)?
Like practically any portfolio theory, MPT is based on the linearization of the solution space, usually posing additional assumptions on this space. These theories select different portfolios when time progresses.
Such portfolios will fluctuate in value over time. In these value fluctuations, the drawdowns and annualized rewards of the portfolios determine the risks and expected returns rather than the standard deviations of individual securities. The question of how portfolios selected by MPT behave through financial crises and recessions in terms of risks and rewards is not answered by MPT.
That validation of sequential investment decisions in terms of portfolio risks and rewards through economic cycles of booms and busts is quantified by DigiFundManager.
+ Why managing your own investments of optimal portfolios when a fund manager can do the job?
It appears to us that the keys to success of such algorithms are (1) the short-term, even intraday correlation times down to the order of a second that determine the ranking of the assets and (2) the estimation technique to calculate the optimal asset allocations for each rank in line with the investment objectives of the investor.
Stock ranking is used to rank the stocks in a given collection at any time in terms of decreasing likelihood to increase in price. Renaissance Technologies mostly self-invests in its funds. Once you have the digital tools like DigiFundManager to self-invest your money, you are able to getting to trade down to each week or multiple of weeks the optimal stock portfolios of Wall Street with expectation values of risk/reward ratios validated over 20+ years that you yourself may be able to get well-balanced of the order of one or even smaller.
+ Do you need 10,000 CPU’s and 90 PhD researchers to configure consistently profitable quantitative investment strategies?
When you are a pioneer in a field, you usually don’t want to take any chances when it comes to possible critical paths in your applied research.
Thirty years ago, computing power was one of them, and brain power to develop effective statistical ranking techniques and efficient search algorithms for estimation techniques another one. Once you know that these correlations are out there in the statistical behavior of the financial markets, they are easier to find.
According to Moore’s law, the density of computer power on a chip increased by 2^15 = 32,768x over these 30 years. The convergence of estimation techniques has been in focus of active research, especially in the field of signal processing.
The availability of historical financial data on Wall Street stocks has developed into a major business arena. According to the same Bloomberg article, quantitative strategies are now outperforming classical fund managers in absolute dollars.
DigiFundManager brings the configuration of quantitative strategies to the retail investor for the first time. It enables the retail investor to design his own unique quantitative game plan that fits his own maximum risk endurance and satisfies his own reward expectation.
+ Which model is better on Wall Street: trend-following or mean-reversion?
Economists use the tautology “regression to the mean”, which appears to imply that being lucky in one instance has relatively high probability of being unlucky the next. These two models must be rewritten in terms of a ranking system where stocks are ranked according to their probabilities to increase in price. You are then able to select the long positions with the highest probability to increase in price and the short positions with the highest probability to decrease in price. The stock with the highest probability to increase in price has rank one, etc. Trend-following and mean-reversion are statistical processes that analyze the statistical behavior over time.
DigiFundManager assumes ergodicity for the statistical behavior of the financial markets. Ergodic behavior assumes that the expected behavior over time equals the expected behavior of an ensemble of stocks traded in the same market at each time. The ensemble of stocks is defined by your Watchlist. Hence, rather than performing the time-consuming processes of analyzing the time-series on trend-following and mean-reversion, DigiFundManager simply ranks the stock in a given Watchlist for a given set of correlation times at each specified time of trading.
The ranking model that appears to work the most effective is that the steepest fallers and climbers in a Watchlist have the highest probability to turn around at each specified time. DigiFundManager allows you to base your ranking on two correlation times of your choice. The shortest correlation time is one week and all possible correlation times are a multiple of weeks. Usually, shorter correlation times give higher expected returns and maximum risks. It is not surprising that correlation times of (multiples of) 13 weeks can be found over 30+ years in a Watchlist of the 505 current S&P500 members to produce optimal portfolios of 50 long and 50 short positions with well-balanced risk/reward ratios.
+ How do trades move the stock market?
Trading such stocks should then only negligibly move the market. According to Bloomberg, almost from the beginning, Jim Simons understood that the fund’s overall size can affect its performance: too much money destroys returns. Experts who designed algorithms for quantitative strategies have expressed that researching how your own trades move the market is not an easy challenge.
For a retail investor, planned investment amounts will usually leave ample room for large numbers of available stocks with sufficient daily-dollar volumes over the past 30+ years. So you can validate the automated sequential decision-taking process of weekly selecting optimal portfolios of the size of your choice in terms of the risks and expected rewards they produce over those 30+ years.
In our opinion, when you keep the solution space linearized, it is not difficult to extend the estimation techniques we apply with a model for a linear feedback mechanism associated with trade sizes. However, in the retail investment market, that extension has little relevance.
+ Is intraday-trading more effective than eod-trading on Wall Street in terms of validated long-term risks and rewards?
The only data needed to quantify the risks and rewards of this sequential decision-taking process of rebalancing already selected portfolios is the continuous stream of historical exchange data. As many brokers offer trading Market On Close (MOC) orders, trading on end-of-day (eod) prices offers a sure case to enable validation of the risks and rewards of sequentially selected portfolios over time using simple eod data.
The timing and weighting processes of fund management are optimization processes in terms of risks and rewards. Hence, these processes only need the simple historical eod data. Screening and ranking of stocks can be done using the simple eod data and/or using any breaking news on financial, economic, and political analyses and outlooks that may influence the financial markets.
Portfolio rebalancing on breaking news requires intra-day trading, which cannot simply be validated by a back test. DigiFundManager only uses simple eod data for its quantitative screening and ranking processes and assumes that investors and traders who choose to apply the program use MOC orders.
Its own weekly screened portfolios of top-ranked 250 stocks outperform the 24%/year rewards of the weekly screened portfolios of 238 Zacks’ rank #1 stocks by roughly 10%/year over the 18.4 years prior to April 2018 when we performed this comparison test.
Our stocks were screened for minimum daily-dollar volumes of US $0.1million. Zacks uses its own ranking system based on forward-looking estimate revisions of some 3000 analysts at over 150 different brokerage firms.
At any given point in time, they are monitoring well over 200,000 earnings estimates and other related data looking for any change. Our weekly screened portfolios of the top-ranked 25 stocks generate 88%/year. It has yet to be seen whether intraday-trading is more effective in terms of risks and rewards than eod-trading.
+ What are the shelf lives or alpha-decay times of classical and quantitative trading strategies?
It is well known that successful patterns have a finite shelf life and suffer from alpha decay. They can come and go, and come back and go again, but you never know when, only in hindsight.
It is believed that the reason rather than cause of this performance decay is the efficiency of the financial markets. One way to measure alpha-decay in the stock market is to measure the t-stat of your investment objective over time. In simple performance terms, this implies that the free cash generated by a sequence of optimal portfolios with constant investments is decaying over time.
DigiFundManager is designed to practically instantly reveal such performance decay validated over time spans of 20 – 55 years for each individually configured quantitative investment strategy. The program shows that successful investment strategies of large investments are usually short-lived.
However, there is room for smaller investments that accommodate retail investors for already 20+ years. The key to individual success is each individual configuration of our screening, ranking and risk modules in combination with an individual watch list. Broker fees play an important role, but the possibility to go short in any of the entries in your watchlist is even more important. It appears to us from the London-Whale incident that the results of apple orchards shouldn’t be hedged by shorting the results of orange orchards.
Short positions intend to take care of the damage control during drawdowns and recessions. Each quarter for already 30+ years, the slowly changing watchlist of the 505 current S&P500 members keeps enabling to configure optimal portfolios of 50 long and 50 short positions with well-balanced risk/reward ratios producing about 12%/year net of broker fees and taxes. The shelf life of this quantitative strategy is already 30+ years as our last demo reveals.
+ How do optimal portfolios perform of investment funds, or of high-EPS, highly-covered, high-dividend, or of S&P500 stocks?
All of those resulting game plans are discussed as tutorials in the Manual. Our choices for configuring those game plans usually give risk/reward ratios of roughly 1 – 1.5, except for the one based on investment funds. That latter game plan turns out to be highly risky through the last financial crisis.
It has the highest risk and lowest reward. Of the remaining game plans one needs to rebalance the portfolios every week except for the game plan that quarterly picks the optimal portfolios from the current S&P500 members. Except for the last one, you can see so-called alpha decay. Over the past eight years, these three game plans show decreasing performance.
As these three game plans require weekly rebalancing, broker fees and dividend tax further significantly exert a downward pressure on the performance. The game plan with highly-covered stocks gives the best performance. The game plan based on current S&P500 members gives the most steady performance without any alpha decay over as many as 30+ years.
+ What are the likelihoods to be successful for an investor account and for a stock to turn their initial values into positive returns?
Hence, as an investor, your probability to make a long-term profit on Wall Street is of the order of 5%. This holds for retail as well as for professional investors. This small probability stands remarkably in contrast with the probability that companies create a long-term investor value above their IPO’s. These latter probabilities can simply be calculated by DigiFundManager with progressing time by realizing that all IPO’s are normalized to “1”.
By calculating the ratio of screened and unscreened stocks where screening is on adjusted share prices larger than “1”, the weekly probability can be charted as in the following chart:
Probabilities of success for investors’ stock accounts (green curve) and for adjusted share prices of company stocks relative to their IPO’s (red curve) starting on April 2007, the onset of the credit crisis. A minimum daily-dollar volume of US $0.1 is assumed for the stocks.
It is remarkable that the likelihood of success for the companies in terms of their investors value increasing above their IPO’s is more than an order of magnitude larger than the likelihood of success for stock brokerage accounts. The chart shows that since the onset of the credit crisis in April 2007, currently some 11 years ago, the likelihood of success for companies for delivering long-term investor value increasing above their IPO’s is slowly decreasing from 88% to 75%.