How is Spotalpha Successful Over Competitors at Beating the Indices in Long-Term

Spotalpha’s algorithms are proven and widely used by top hedge funds globally. In addition, our analysis is completely automated with absolutely no human involvement. A combination of these two factors gives us an edge over our competition.

There are four aspects to successful investing: Rational, Timing, Selection and Allocation.

Being Rational
Humans are often irrational when it comes to investing. It is well documented that more than 70% investors lose money even during a strong bull rally while this number increases to more than 90% during volatile times. Most investors tend to hold on to their losses much longer while selling their profitable investments too quickly. This is a well researched behavioural trait since the 1970s, called the “Disposition Effect” and is understood to arise from “Prospect Theory“. You can read more about Disposition Effect in this Wikipedia article.

Spotalpha eliminates irrational investing behaviour by being 100% automated. It’s analysis is not biased by whether it’s previous or current position is profitable or not.

The famous investing adage, “buy low, sell high” is very simple and powerful but yet very difficult for a human investor to follow.

Most investors don’t use stop-losses when they start an investment. This arises from the concept of ego where an investor is not willing to admit that their decision could be wrong.

Further, to avoid experiencing the psychological pain of a loss, investors continue to hold positions where losses are mounting, convincing themselves that they have not lost as long as they have not closed their position. This causes two things:
(1) capital is allocated to a loss making investment, and
(2) capital is not available for a new investment that can result in better profits.

Investors finally end up closing their loss making positions when the pain of loss becomes too much and the overall fear in the market fuels these emotions even more.

Spotalpha’s proprietary trend following algorithms always have built-in stop-losses and are powered by AI to help identify trend more accurately. The following image shows the trend of Apple Inc. (AAPL).

The blue area represents bullish (rising) while the grey area represents bearish (falling) trends.

The prices of several investments are cyclical in nature. This could be caused both by macro-economic activity (such as rising or falling inflation) and industry specific business cycles (such as crop yield). Therefore, buy-and-hold of an investment over more than a year, in general, is not a very efficient investment approach. It exposes the investment to greater periods of risk when compared to the return delivered.

Spotalpha’s algorithms screen the entire market, everyday, across multiple time-frames for new opportunities. This helps Spotalpha identify macro-level trends such as sector-rotation and help rebalance portfolios more efficiently. The following image shows how Spotalpha’s heatmap tool helps identify companies and sectors delivering Alpha or outperformance when compared to the benchmark.

In the above image, stock symbols represented by green colour are outperforming the benchmark while those in red are underperforming during the selected time frame.

The right allocation for stocks that have been selected is very important for two reasons:
(1) Allocating to stocks that are not rising causes a drag effect on the portfolio
(2) Allocation that does not have adequate diversification can cause risks to amplify.

Spotalpha’s Portfolio Optimiser is a tool that helps identify the ideal allocation for each stock in the selected portfolio. Similar tools can be found in platforms such as the Bloomberg and Reuters Terminal and are widely used by fund managers globally to identify efficient allocations. Spotalpha’s Portfolio Optimiser makes this tool affordable and available to self-directed (DIY) investors.

The following image shows how allocation can make a huge impact in improving return while reducing risk. The green line represents performance of a portfolio that has allocated equal amount to the 30 Large Cap companies that are part of DOW index in early 2016 while the orange line represents optimised allocation to only 8 out of these 30 companies.

In the above example, the process of efficient allocation improved returns from 68% to 184% while reducing risk from -35% to -25%.

In summary, a combination of four factors – Rational investing, Timing, Selection and Allocation is what helps Spotalpha outperform the benchmark and it’s competitors.

Useful Links:
Spotalpha US
How to Use Spotalpha (YouTube)