The Research team primarily uses a two-step statistical methodology to evaluate the efficacy of new strategies and models. The first step aims to identify certain patterns or effects in the market and seeks to determine whether they are persistent and statistically significant. The second step is designed to robustly back-test trading strategies over a long period of time, typically ten to twenty years.
In order to test the strategies, the researchers will look for stability, robustness and statistical significance of the predictive power. Analysing data and testing strategies faces many challenges as often the signals are not very strong and a core part of the team’s work is refining the techniques used to effectively assess whether the signal truly has predictive power. The research will consider in-sample and out-of-sample performance with the goal of testing the signal on data that has not been used in its creation. There may be instances where a signal does not have the same efficacy out-of-sample, despite the in-sample results having shown strong performance and a high Sharpe ratio.
The efficacy of these strategies is assessed in terms of its contributions to the characteristics of the portfolio and its performance. Particular attention is given to the risk adjusted returns of the strategy, its draw-down characteristics, the costs of implementation of the trades and their market impact.
Beyond risk and returns considerations, when applicable and in the scope of responsible investments, sustainability of the portfolio holdings can be assessed via characteristics such as ethical, environmental, social or governance related metrics. As an example, all funds include our exclusion list specifically restricting the investment in issuers involved in cluster munitions. Other funds include a wider exclusion list. Additionally, there is a commitment to implement enhanced internal measures to consider additional environmental (e.g. emissions and water consumption), social responsibility (e.g. diversity at the workplace, employee benefits) and corporate governance (e.g. independent directors & internal committees) items, to name some, in the investment decision process.
All else being equal, more sustainable holdings should be preferred, and, when the fund mandate specifies it, sustainability can be traded against a small loss in expected risk-adjusted returns.