From Institutional Investor:
A market-neutral strategy powered by new AI techniques has beaten its human peers by multiple return and risk measures in this year’s market downturn, one of the most volatile environments for stocks.
Castle Ridge Asset Management’s market-neutral strategy is up 12.1%, before fees, year-to-date to the end of June, according to a letter obtained by Institutional Investor. Though the firm declined to comment on the investor letter or the strategy’s performance, Castle Ridge CEO Adrian de Valois-Franklin said the firm’s proprietary platform doesn’t use typical static machine-learning approaches like neural networks and deep learning. Instead its algorithms are based on patterns of human behaviour.
“Human biases persist in all markets, whether currencies, FX or any asset class,” he says. “Once the AI platform learned that behaviour, we found it was 72% efficient at predicting portfolios that rise in value over a one-week timeframe. The system is modelling independence of behaviour.”
Alex Bogdan, chief scientific officer, explained it with an example. “If you’ve never been to Japan, you land and you don’t know what to do. So, you look around and mimic what other people are doing. You have no independency bias. Conversely, if you are in your own environment and surrounded by people less knowledgeable, you make independent decisions. We can detect that independency — when companies are behaving independently. That tells us they have something or know something that someone else does not.”
“Market neutral strategies have had a tough time. It’s extremely hard to constantly net out any market exposure, especially this year when correlations between stocks and sectors have broken down,” says Jon Caplis, CEO of hedge fund research firm PivotalPath.