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Quant Investing: Adaptive Beta 2021

This report revisits Gamma Paradigm’s Adaptive Beta strategy framework – one of the two pillars of Gamma Paradigm Prime Fund. Gamma Paradigm’s Adaptive Beta, shorthanded as Adaptive Beta, has evolved from early 2017 to today. The Adaptive Beta 4.0 was introduced in 2019 and has proven its superior risk reduction during market turmoil.

The reason for the need of Adaptive Beta is two-fold. Since late 90s, the US market has experience more severe and more frequent drawdown. Even though the market came back stronger after each hit, it is getting harder to design an all-weather portfolio. When the emotional rollercoaster is the last thing people would want to accumulate their wealth, we need a more flexible portfolio construction and risk management system to take on so called market themes.

Adaptive Beta Illustration

On the other hand, one-dimensional market timing algorithm is hard to integrate with multi-asset portfolio management. If we examine the Fed’s 2020 Quantitative Easing, inflation became the focal point for asset picking after super-low yields of the US Treasuries. With the need of downside protection, a timely switch to long-term bonds without incurring inflation loss is crucial. This investing decision is multi-dimensional like a decision tree. Adaptive Beta use a hierarchical risk-indicator system to connect a theme-based portfolio management. We can then use this decision-tree like system to do a high dimensional risk classification and accommodate as many asset classes as needed.

We introduce Adaptive Beta 5.0 for our Gamma Paradigm Prime Fund. The enhancement is equipped with a new risk indicator based on higher frequency data and an inflation protection theme. We show how the theme-based portfolio construction can produce better returns in recent years.

Backtest Simulation

The Adaptive Beta strategy has generated 1.5 Sharpe ratio since launch in the fund.

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Peter Lin
Managing DirectorGamma Paradigm Group

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