I opened a Designer Model this week. The description provides some details, but a thread gives me more room to explain what it does. There is also a question I would like the forum’s view on. I doubt I am the only one with this issue, but I haven’t found a good answer yet.
Relation to The Alpha Engineer. The model uses The Alpha Engineer’s multi-factor ranking system, the same system I write about on my site. However, the Designer Model runs on a broader universe: about 5,700 stocks versus 3,700 for my own live model. Loosening a few universe settings improved results a little in testing without materially affecting the risk metrics. Also, because a Designer Model might be used by up to 10 people that trade at the same time, its buy rules are much stricter on tradeability.
Universe. Small- and micro-caps across the US, Canada, the UK and continental Europe, restricted to exchanges where Interactive Brokers (IB) is active. Most small-cap models here cover only one side of the Atlantic. My ranking runs across both because my factor logic travels well and the pool of candidates roughly doubles. So I believe it adds something new to the models available here, which some of you may find interesting.
Portfolio rules. Twenty positions, rebalanced weekly, selected from the top of the ranking. Exits follow a single rank-based sell rule. The buy rules do three things:
Buy1 StaleStmt = 0
Buy2 AvgDailyTot(1,0) > 250000 AND AvgDailyTot(1,1) > 250000 AND AvgDailyTot(1,2) > 250000
Buy3 Close(0) > 1
The first keeps out names whose latest financial statements are stale. The second asks for more than 250K USD of daily traded value on each of the last three trading days, rather than as a three-day average, so one busy day cannot carry an illiquid name into the portfolio. The third is a price floor that excludes penny stocks. Annual portfolio turnover runs at about 250%.
My question. I restricted the universe to exchanges where IB is active, so that an IB user would most likely be able to trade every name. In practice, the coverage has gaps: IB lists a country as covered, yet some of its large primary or secondary exchanges stay out of reach. Norway is one example, at least for me as a European account holder. As a result, a few percent of the names cannot be traded on their home exchange. Sometimes you can find them elsewhere; many Norwegian names, for example, also trade in Germany. How do you handle this in your own models? Or should we just accept the leakage? A future update of this model could align the universe more tightly with what IB actually offers. I would rather do that once, and do it well.
Model page: https://www.portfolio123.com/app/r2g/summary?id=1948189
Methodology and research: The Alpha Engineer — Investing with a Quantitative Edge
Disclaimer: this is educational investment research, not personalized investment advice. I may hold positions in names the model holds.