Bear Market Equity-Only Quantitative Portfolio Strategy

Abstract

The University of Arizona’s Chicago Quantitative Alliance Investment Challenge team used a bear market strategy to maximize the effectiveness of its all equity portfolio. The portfolio chose this strategy due to the macroeconomic climate at the beginning of the challenge in late October 2018. The escalating tensions of the China and U.S. trade war as well as a global economic slowdown spurred by a decrease in market optimism spurred the group’s decision to create a bearish strategy. The portfolio optimized itself by focusing a majority of the portfolio’s risk into sector allocation. For the short portion of the portfolio, the group chose historically underperforming sectors in a bear market such as the communications and information technology sectors and historically overpoerfomring sectors such as consumer staples, real estate, and utilities. To further optimize the portfolio, the group used a select group of factors for each portion of the portfolio to maximize the portfolio performance. For further detail, refer to the pages 6 and 8. In conclusion, the portfolio performed well during the market’s slowdown in December 2018 which culminated in a 5% drop in the market on Christmas eve. However, the market’s strong recovery over the 1st quarter of 2019 has hurt the portfolio’s performance. In future iterations of this strategy, an emphasis on momentum factors such as the comparison of 50-day average price to 360-day average price should be used to minimize the risk of changing market sentiment.