New York (HedgeCo.net) – The Ashbury Behavioral Long/Short Model is designed to exploit long-term behavioral biases in forecasting, fundamental valuation, and trend following. It targets areas where people’s behavioral biases are pervasive and impossible to overcome, using two sub-strategies that emphasize accumulated effects over time and aggregated effects across investors. The first sub-strategy corrects for biases that occur when investors are forecasting with fundamental data. Because there is so much data available on companies today, investors ultimately rely on heuristics and mental models to reduce the burden of processing new information. This leaves them vulnerable to behavioral biases that collectively cause valuations to have much higher variance than they should, and result in a much weaker ability to accurately process new information.
The second sub-strategy focuses on investor biases when reacting to events. Because of the overwhelming amount of information in the market, investors often focus on big events and miss steadily accumulating signals. Since everyone sees these same big events, it is extremely difficult to generate an edge and the signal is quickly arbitraged away. However, this leaves any steadily accumulating signals unnoticed and usable for trading.
The model uses an automated process to reduce variance in forecasts and predict how investors will adjust their mental models for an individual security over time and an automated model that processes events and trade prices to separate the big events from the accumulating weaker signals in order to take positions that are more likely to generate returns for our investors. These two automated processes pull the two sub-strategies together.
Looking at a snapshot, the model is up 4.23% from May 1 (the date it was added to the platform) through midday on July 22. The most impressive performance number for this model is the 6.47% return over the last 30 days. The standard deviation is at 8.95% and that is among the top quartile of the single-strategy models, with lower readings being considered at the top. The Sharpe Ratio of 1.1 is also among the quartile of readings and in the case of Sharpe Ratios, higher readings are considered better.
The model is one of the more active models with over 500 positions at the time of this writing. Due to the high number of positions, you can also see from the snapshot that the minimum allocation to the model is $75,000. Looking at how the positions are allocated to the various sectors, we see that the portfolio is extremely diversified with allocations to 23 different sectors and none of the sectors have an allocation greater than 10% in the long book.
The short book is also tremendously diversified with 28 different sectors represented, but we do see two sectors with allocations at 10% or higher (Oil & Gas and Electric).
The Ashbury Behavioral Long/Short model is an extremely well diversified model with allocations spread widely over an abundance of sectors as well as positions. Because of its long/short structure, bullish investors looking for some protection should the market go through a correction could benefit from the model. If an investor is skeptical regarding the overall market, but doesn’t want a short-only model, the Ashbury model could fit their needs as well.