ARCUS Alpha Compendium

1 – Introduction

The ARCUS Alpha Compendium (AAC) is a collection of quantitative studies specifically focusing on US stock market indexes. Each AAC study serves to identify anomalies to the efficient market theory that have historically generated what are known as “abnormal returns”. The AAC seeks to highlight market anomalies that are a) statistically significant; b) recurrent;  c) evenly spaced over time and d) present and identifiable in several different time series. They must also have a basis in market theory and not just the product of data mining.

The ARCUS Alpha Compendium is designed for:

  • Prop traders or family offices seeking to acquire a portfolio of tried and tested strategies, inclusive of system logic and code
  • Longer-term investors and position traders wishing to improve their returns by using shorter-term systems
  • Any trader or hedge fund wanting to enhance their portfolio of trading strategies

The majority of AAC studies were developed between 2000 and 2010. Some of the systems have been tweaked or re-optimized over the years, but most of them remain strictly unchanged from the day they were first created. This has allowed for several years of forward-walk analysis, allowing the authors to validate the continued strength and relevance of the edges identified in each study.

2 – Financial Instruments

AAC studies analyze the following instruments:

SPDR S&P500 ETF (SPY)

The SPY is the world’s most traded ETF and provides a reliable proxy for studying the S&P500 index. Most importantly, the data series’ high, low, open, close and daily volume values are scrubbed of all data artifacts and are highly dependable as of 1993. This results in an unusually clean, data-rich and reliable statistical time series dating back over 23 years.

S&P500 Index (SPX)

The SPX is not a tradable financial symbol per-se, but unlike the SPY, the IVV or the ES, it offers data going back to the 1960’s. It is therefore the ideal symbol to test the presence and persistence of market edges over multi-decade periods.

Findings from AAC studies can be directly applied to trading the SPY ETF, the ES e-mini (S&P500 futures contract), or any other highly-correlated instrument.

3 – Using the Compendium

The 2016 edition of the Compendium features 50 studies each detailing a unique high-probability trading system. As an option, AAC studies are available in TradesStation EasyLanguage code. The TradeStation pack includes several workspaces, associated source code, functions and indicators.

The studies can be used in a number of ways, depending on the specific objectives each Client. AAC studies can be used as proof-of-concept papers that identify specific market biases. Speculators and system developers can expand on this information to create their own portfolio of trading strategies. Alternatively, the studies can be used as powerful directional guides, assisting traders in making their entry or exit decisions. Finally, AAC studies can be exploited as actual trading strategies, either individually or collectively. This of course requires each Client to adapt these systems to the trading platform, position sizing policies and risk management parameters specific to their internal practices and trading plan.

4 – The Forces Behind Abnormal Returns

There exist a number of forces driving capital markets. These include microeconomic and macroeconomic news, government intervention, seasonal forces, technical support & resistance levels, inflows and outflows of capital, the presence of established trends and the strength of collective “sentiment”.

Studying the presence and strength of these forces is done by way of technical variables. These include price-action, volume, volatility, breadth, relative strength, short-term and long-term trend and many others.

Having identified the presence and impact of these market forces, exploitable edges are then quantified using systems based on:

  • Mean-reversion
  • Momentum / follow-through
  • Seasonality
  • The study of recurring events
  • The study of extremes and outliers

The objective is to identify distinct market anomalies that yield clear, quantifiable and actionable edges, and to dismiss those that are not statistically significant or not robust enough to withstand the test of time.

5 – AAC: Development Process

AAC studies aim to generate systems that are simple, intuitive and robust. Entry rules are under-optimized by design to avoid curve-fitting. Exit rules are for the most part time-based, thereby constraining risk. Every AAC study is the product of a stringent development lifecycle:

Concept Phase

A hypothesis is formulated based on a number of possible sources, including journals, financial and economic literature, market observation and personal experience. Data mining is not used to generate hypotheses.

Analysis Phase

A prototype is developed and tested. Initial back-tests are performed over the in-sample period. The resulting statistics are analyzed and the hypothesis is either validated or rejected. Approximately 80% of initial hypothesis are discarded at this stage.

Research & Development Phase

The system is tested out-of-sample to check for robustness. Parameters are tested and the holding period is optimized in search of peak edge manifestation. The system is then subjected to internal peer review to obtain an objective assessment. Approximately two out of three systems are discarded at this stage.

Production and Maintenance Phase

Systems are graded based on their performance statistics, trade count and equity curves. Walk-forward analysis is then performed and ongoing performance is reviewed on a quarterly basis. Systems are upgraded, downgraded or retired based on their continued robustness.

6 – Additional Information

Should you want more information on the Arcus Alpha Compendium, please send us an email via the Contact page. We will be happy to send you the full prospectus and price schedule.