Artificial Intelligence Equity Arbitrage

Based on Innolab’s proprietary Artificial Intelligence

Strategy

The equity arbitrage investment strategy is based on Innolabs AI Research and Analysis module. The investment universe consists of +50 sector and worldwide country equity indices. The strategi is based on pairs trading, where two assets are traded against each other, also called statistical arbitrage.

Selection of asset pairs from the universe is characterized by three criteria:

  • Pairs are constructed with one long and one short position adjusted for risk.
  • Assets in a pair must correlate with at least 0.67.
  • The AI module must be at least 60% confident that the pair return will be positive after three months.

After passing the selection criteria, a pair is converted into an investment through futures in the underlying assets. The pairs are continuously monitored and are stopped if the return exceeds a fixed profit or loss threshold. The number of pair opportunities provided by the AI module varies over time. In order to control the portfolio risk and deliver a stable return, the position sizes are scaled through risk parity. In periods with many opportunities the size is scaled down, and in periods with few opportunities, the size is scaled up.

Return features

The stable single digit returns delivered by the strategy have extremely low correlation to global equity markets. The portfolio has an absolute return focus, where risk management and portfolio construction aim at managing downside risk. The portfolio is a perfect diversifier and alternative to long only equities and short to medium fixed income exposure.

Highlights

Sharpe ratio


1.49


Annual return


7.0%


Annual volatility


11.49%


Max. drawdown


11.49%


Monthly returns

Statistics

MONTHLY RETURN STATISTICS
YEAR JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
2017 1.30% 0.29% 3.46% 5.21% -0.97% 0.98% -1.74% 4.22% 7.53% -0.69% -2.27% 0.22% 18.44%
2018 7.89% -2.49% 3.62% 1.40% 11.07% 5.69% -0.16% -3.73% 4.15% 2.33% -1.16% 0.24% 31.69%
2019 -0.82% 4.68% 1.12% -1.60% 1.18% 5.66% -0.87% 4.52% 0.51% -1.08% 0.90% -1.18% 13.44%
2020 -0.11% 2.96% 8.67% 1.98% -1.06% 4.37% 4.71% 0.62% -4.12% 5.04% 12.75% -0.39% 40.25%
PORTFOLIO STATISTICS
ITD YTD
Sharpe ratio 1.49 1.91
Annual volatility  % 15.6 17.9
Return  % 24.5 40.25
Max drawdown  % -7.7 -5.8
Downside risk  % 9.8 10.4
Avg. leverage  % 289 208
PAIR STATISTICS
ITD YTD
Country pairs % 32 27
Mixed pairs % 29 28
Sector pairs % 39 44
Accuracy % 58 58
Avg. holding period. days 49 47
Avg. pair confidence % 64 65
PORTFOLIO STATISTICS
ITD YTD
Correlation to MSCI 0.04 -0.04
Alpha to MSCI % 25.8 40.2
Beta to MSCI 0.04 -0.03
Correlation to ACWI 0.00 -0.07
Alpha to ACWI % 26.0 41.7
Beta to ACWI 0.00 -0.04
PAIR STATISTICS
N. P. A.
EUROSTOXX 50 358 28 54%
CAC 40 169 17 66%
STOXX Europe 600 Oil/Gas 160 15 59%
STOXX Europe 600 Auto 161 19 60%
OMX Stockholm 30 137 7 62%

Important notice

‘Innolab is a technology company and is not registered as an investment advisor.
Performance statistics are based on an out of sample live walk-forward test after commissions and trading fees.