Adaptive Strategies for Evolving Markets
The philosophy that informs the development of all of AlphaSimplex’s strategies is based on the Adaptive Markets Hypothesis (AMH). An innovative theory of market behavior, the AMH recognizes that financial markets are neither always efficient nor always rational, but they are highly competitive and adaptive. As a result, market conditions are ever-changing; market volatility, risk premia, and cross-asset correlations are not static. The implication is that investment strategies must continuously adapt as markets evolve in order to deliver more consistent performance.
This philosophy informs the development of all of the firm’s strategies and, in AlphaSimplex’s opinion, sets them apart from those of its competitors. Typical quantitative investment strategies start from an assumption that markets behave according to a fixed set of rules. AlphaSimplex believes that such approaches (e.g., factor-based linear models) share a critical weakness: the factors are often static. As a result, quantitative models are often criticized for being too easily surprised by—and slow to react to—sharp and non-linear market movements. In contrast, AlphaSimplex designs models in recognition that financial markets are highly competitive and adaptive. Unlike typical models, the strategy’s models incorporate innovative statistical techniques for dynamically weighting multiple models to adapt to different market conditions, factors, and time horizons.
WHAT WE BELIEVE
- Market dynamics and efficiency will vary over time and investment strategies must allow for this
- Risk premiums, market volatility, and cross-asset correlations will vary over time
- Any single model’s effectiveness will vary over time
- Sophisticated risk, model, and factor attribution analytics can help identify opportunities for innovation and adaptation
- Risk management can be an important source of alpha