Making News Matter: Managing a Fund by Tracking the Market Sentiment

Which kind of data do you use to predict market sentiment?

If you were a pilot flying a plane with 300 passengers, would you opt-out of using the instruments in the cockpit? Would you be fearful they were going to take away your maneuverability or your autonomy? No. You'd know that the instruments are there to evaluate the conditions and to see more and further than you can see. You are still flying the plane; the instruments allow you to make better decisions about flight path, speed, trajectory, and acceptable risk.

I built satellites. To steer a satellite accurately, you use radar—not humans. I wondered why we couldn't do the same thing with financial investments. This is what we have done at YUKKA Lab; by plugging into financial news, we have created a virtual cockpit for the investment professional to pilot: the News and Trend Labs. The cockpit displays the information and the pilot makes the decisions, but this pilot will have more information at their fingertips than anyone has ever had access to before.
By applying natural language processing and machine learning techniques to the analysis of market sentiment, we get an unprecedented overview of sectors, trends and patterns. Using only accredited financial news sources, and no social media, the technology gains specific insights, while also creating models of overall market activity.
From this hawk-eye view, sentiment can be seen to be a reliable indicator of market trends. The use of Augmented Language Intelligence (ALI) pilots us away from the danger zone of human fallibility. ALI is the result of pairing natural language processing (NLP) with machine or deep learning. ALI compiles more data than a human could process; has never lost its money in the market; and does immediate course correction upon receiving new information. The technology gives insight into sentiment that allows the pilot to steer clear of the downsides and better manage risk.
Belvoir Capital was an early adopter of our technology and their Sentiment SICAV - Europe 600 fund has had promising results. Begun in 2017, the fund looks at the 15 largest companies across all 19 sectors. In its first year, the fund performed at 9.61%, with a consistent investment level of 125%.

For a fund like this, the technology is a partner that reads the news and keeps track of the statistics. Sentiment becomes an additional signal to enhance decision-making; one that has access not just to current news and trends, but also historical news data, allowing it to map market trends back to 2005—back-testing shows the ten-year cycle fund performance at 140.97%, versus 60.01% for the benchmark (STOXX Europe 600).

Imagine you have advanced warning of a trend shift, because you have a comprehensive analysis of the news. While humans might forget events from last year or last decade, the technology is able to store and include these events in its statistics, giving long-term accuracy. For Belvoir Capital's Steffen Bauke, it "captured all the upside," and saw changes "earlier than any other warning system."

Though critical at the beginning, Steffen Bauke realized over time that "the psychological effects of human behaviour" present in fund management could be mitigated with the News and Trend Labs. Sentiment SICAV is a fund run by human managers who are supported by AI. The Sentiment SICAV – Europe 600´s strategy aims for a long-term increase in value while having smaller drawdowns than the benchmark.

As sentiment is often one to three weeks ahead of changes in the market, the signal becomes a warning system. The insights tell a story the managers can monitor and act upon as necessary. In collaboration with YUKKA lab, fund managers created a set of rules for the fund, which they apply based on the indicators. The signal is looked at every 14 days. This time period allows fund managers to reallocate investments when sectors are having bigger drawdowns, then be back investing in a sector before the market—anticipating the uptrend before the mass of investors is reinvesting in this sector—all with less volatility.

Looking at the example of the Sentiment SICAV - Europe 600 fund run by Belvoir Capital, we see what AI can do when managed by skilled professionals. The News and Trend Labs, powered by ALI, create a safety net for professionals, boosting confidence in decision-making.

Even if you don't have to use all the instruments in your cockpit, it's good to know that they are there and functioning, in case of emergency. They can't replace the subtleties of human interaction and decision-making, and they aren't going to predict the next flash crash, but used skillfully, they can inform and enhance performance.

I would love to hear your thoughts on market sentiment trackers.

 

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