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Diesel: A Defensive Alpha Cloning Strategy

Our first alpha cloning strategy using Liquidity Lamp Summary data debuts a new method of harnessing the predictive power of our real-time signal. The data team at Exegy’s Signum used daily summary data to construct an algorithm that predicts the next day’s aggregate volume of reserve orders—the large blocks of hidden liquidity created by institutional investors. Our whitepaper outlining this strategy, which we call Diesel, shows how it delivers 4x better returns than the S&P 500, with 10x less drawdown risk.

The Power of Alpha Cloning

Professional traders know the value of information about the actions of natural investors. For years, they’ve scoured regulatory filings to learn where the “smart money” is moving, a process known as “alpha cloning.” The problem with this approach is the time lag between investors’ actions and their filings, which can be measured in days to months.

Our Signum data scientists found a faster way. Liquidity Lamp  is a real-time signal that alerts you to the appearance and movement of reserve orders (aka “iceberg orders”) a favorite order type of large investors. Our alpha cloning whitepaper reviews how Liquidity Lamp can be used to track the movements of institutional investors.

While this information is powerful on its own, we didn’t stop there.

Mining Summary Data for Insights

Liquidity Lamp delivers an end-of-day aggregation of reserve orders on a per-stock, per-market basis. By applying machine learning to this data, we could go from identifying reserve order activity to predicting it. The algorithm uses the past four days of reserve order activity to predict the fifth. The result is Diesel, a long-short strategy that rebalances daily at the open and holds all positions overnight

In our alpha cloning whitepaper, we show that in a head-to-head comparison with the S&P 500, the total return on Diesel was 20.8%, to the index’s 5.3%. Max drawdown was -3.34% for the alpha, compared to the index’s -33.92. Think this sounds too good to be true? Read the whitepaper. Submit this form, and an Exegy team member will send it to you.

Download Whitepaper