Ai For Alpha Introduces Its New CTA "Risk Off" Strategy
September 17 2024 - 10:12AM
Business Wire
Ai For Alpha, a pioneering fintech specialized in AI investment
strategies, announces the launch of its latest innovation: the
"Risk Off" CTA strategy.
Ai For Alpha has developed a cutting-edge technology called
Decoding, which enables the creation of replication portfolios for
both traditional and alternative strategies, including CTAs, Global
Macro, and hedge funds global benchmarks. These portfolio models
are implemented by major money managers and banks' QIS desks to
create market access investment strategies.
The Ai For Alpha "Risk Off" CTA strategy utilizes the Decoding
technology to replicate a CTA managers benchmark while dynamically
adjusting the allocation to reduce the exposure to "risk on"
assets, resulting in a more defensive profile.
Context:
In recent years, particularly within the context of rising
inflation, the correlation between equities and bonds has become
increasingly unstable, challenging the diversification profile of
traditional CTA strategies. In response, Ai For Alpha developed the
"Risk Off" CTA strategy, which leverages its advanced Decoding
technology to dynamically allocate to "safe assets" within a
trend-following replication portfolio.
The "Risk Off" CTA strategy builds upon the foundation of the Ai
For Alpha CTA replication model, renowned for inferring allocations
from top CTA managers across a broad investment universe, including
equity indices, bonds, interest rates, commodities, and
currencies.
To further enhance the defensive bias of this allocation, Ai For
Alpha introduced a risk-off filter within the replication process.
This filter employs a non-linear hysteresis algorithm, inspired by
principles from physics, to robustly classify assets into "risk on"
and "risk off" categories. The filter is based on the rolling
two-year correlation of each trend factor to a basket of global
equity indices, ensuring stability and precision in asset
selection.
"This new replication strategy combines Ai For Alpha's
recognized expertise in AI-powered investment replications with a
portfolio adjustment that tilts towards a more defensive
allocation," says Béatrice Guez, CEO of Ai For Alpha.
An Enhanced Defensive Profile:
The "Risk Off" CTA strategy offers a significant shift in the
CTA return profile, prioritizing trend positions with negative
correlations to equities. While this approach may give up some
risk-adjusted returns compared to traditional CTA strategies, it
delivers a notably higher defensive profile during market
downturns.
"The CTA replication can be classified as a proxy hedge and
allows for better risk management in our clients' portfolio
construction," adds Thomas Jacquot, Chief Revenue Officer. "It
permits exposure to CTA strategies with some negative correlation
to the equity market, showing a -35% historical correlation to US
Equites versus -3% for traditional CTA Trend benchmark."
Key Performance Highlights:
- Reduced Correlation with Equities: -35% correlation to
the US Equities.
- Asymmetric Returns: The "Risk Off" CTA strategy enhances
CTA diversification by providing an asymmetric return profile,
offering investors a reliable proxy hedge against equity market
corrections.
- Strong Downturn Performance: The strategy is
particularly effective in downturn markets, with the average
monthly performance significantly improving during periods of
equity market decline.
Guez summarizes, "The Risk Off CTA strategy delivers
substantially higher returns in severe downturns, with an average
monthly performance of 3.7% when US Equities declines by more than
6%."
Statistics (Dec 2004 – Sept 2024):
- Annual Total Return: 8.1%
- Volatility: 9.1%
- Max Drawdown: 15.7%
- Sharpe Ratio: 0.65
- Return/Max DD: 0.51
About Ai For Alpha:
Ai For Alpha is a leading provider of generative AI and
AI-powered investment models to large financial institutions across
Europe, the Americas, and Asia. The company has received numerous
awards for its achievements in AI applied to finance, including the
EIT's European Digital Label for Innovation and the Women TechEU
2023 award. Ai For Alpha's publications rank in the top 1% of
most-read articles on SSRN, the world's largest repository for
research in social sciences.
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Email: marketing@aiforalpha.com