In this blog post, I will explore the goals of Quantiacs when organizing their contest and discuss potential improvements to better align the interests of developers with those of Quantiacs. By reevaluating the contest setup, we can create a more conducive environment for the development of profitable and robust strategies.
Understanding Quantiacs' Goals (I am not an insider this is my rational guess):
Quantiacs aims to identify the top X strategies that meet the following objectives:
Quantiacs seeks strategies that exhibit profitability in the long term, extending beyond a mere four-month period. The focus on long-term profitability ensures the development of strategies that can consistently generate positive returns, providing stability and sustainability.
Quantiacs recognizes the importance of utilizing top strategies that are not highly correlated. By encouraging uncorrelated strategies, Quantiacs aims to build a diverse and resilient portfolio. Correlation among strategies can amplify risks and diminish the benefits of diversification. Therefore, strategies that exhibit low correlation are preferred, enhancing overall stability and risk management.
Quantiacs values strategies that are inherently well-diversified and not overly concentrated. A well-diversified strategy reduces reliance on specific assets or markets, mitigating potential losses associated with single-point failures. Quantiacs promotes strategies that encompass broad market exposure and distribute risk across various assets or sectors.
Contest Setup and Its Impact:
However, the current setup of the contest may not entirely align with Quantiacs' objectives. The contest is primarily focused on finding a strategy that performs exceptionally well in terms of the contest Sharpe ratio over a four-month period.
Incentives and Rationality:
As a rational developer, the contest goal may incentivize you to build highly risky strategies that generate exceptional returns within the short contest period. This approach aims to secure a top position in the rankings and to get a riskless try with real money (allocation of funds). However, this mindset does not fully consider Quantiacs' emphasis on long-term profitability, low correlation, and inherent diversification. Additionally, many developers adopt similar strategies, resulting in a high degree of correlation among the top performers. Because the strategies that aims short term profitability are in many cases similar.
To better align the objectives of developers with those of Quantiacs, here are some suggestions:
Customized Risk-Weighted Score:
Introduce a customized score that places more weight on risk. For instance, an adjusted Sharpe ratio that emphasizes the volatility component or a comprehensive performance score that considers multiple aspects such as mean, recovery time, volatility, downside beta/capture, max drawdown, concentration, and correlation with other (top) strategies.
Multiple Rankings for One Contest:
Introduce multiple rankings within a single contest. For example:
- The first ranking could focus on the classical Sharpe ratio.
- The second ranking could place more emphasis on the risk side, considering a customized score that accounts for the risk of an investment strategy (while still considering returns).
- The third ranking could emphasize correlation/uniqueness, quantifying how much return was generated per unit of correlation/uniqueness.
- Allocate positions to the top three strategies in each ranking, with each developer eligible for only one allocation.
Adjust Submission Filters:
Consider adjusting the submission filters, such as requiring a minimum number of actively traded assets within each strategy (e.g., 10 or 15). Additionally, strategies with excessively high returns that may indicate overfitting should not be accepted.
Extended Contest Duration:
Consider increasing the contest duration significantly, from four months to, for example, 12 months. This adjustment could differentiate between genuinely profitable strategies and overfitted or risky ones. But this adjustment would be clearly against the interest of the developers because the contest would be dissolved only once in a year. To maintain regular participation, a potential solution could involve starting a new contest every three or four months, each running for a year.
By implementing these improvements, Quantiacs can foster a contest environment that better aligns the goals of developers with their own objectives. These adjustments would promote long-term profitability, encourage uncorrelated strategies, enhance inherent diversification, and lead to the development of more robust and sustainable investment strategies.
With this blog post, I hope to contribute to the continuous improvement of Quantiacs and the better alignment of goals between Quantiacs and developers.