Creating an Absolute Return Algorithm that Competes with the Highly Volatile Chinese Exchange Market.
Principal Global Investors is a global asset firm offering a boutique investment atmosphere to its clients by conducting independent research and, thus, providing a customized investment strategy to clients. Chinese clients have shown increased demand in an absolute return fund that uses Chinese based equities. An absolute return fund is a type of fund that seeks to shield clients from high volatility while producing positive returns over a certain period. This has proven a difficult task for many investment firms and the highly volatile Chinese exchange market adds more complexity to the problem.
This project will research the Chinese economy to find key macroeconomic indicators that could influence the equities market. The chosen macroeconomic indicators (i.e. Gross Domestic Product (GDP)) will be used, along with microeconomic indicators (i.e. Simple Moving Average (SMA)), to develop a multi-factor model that predicts short-term market movement and returns a yearly positive return on investment greater than the yearly return of an identified Exchange Traded Fund (ETF) tracking the FTSE China 50 Index, an index that tracks the largest and most liquid companies in China. The project will analyze five years of economic and financial data from China and the U.S. as the U.S. has close economic ties to China and could provide predictive insight into market movement. The model will account for seasonality of macroeconomic data and the timing of the release of data.
To create the model, the team will use both supervised and unsupervised learning methods to choose macroeconomic indicators. As well, unsupervised learning will be used to evaluate microeconomic indicators and find trading signals. Once signals have been identified, a set of investment strategies for buying and selling ETFs will be developed and evaluated for effectiveness. The results will stimulate further research into the absolute return algorithm problem space and could increase the market presence of PGI in China.