Aikido Finance has a variety of investment strategies available on its website, each with different metrics to ensure that an individual investor’s preference is met. These quantitative strategies are created by the process of filtering and ranking on the basis of the desired metrics such as Dividend Yield or Return on Equity. Once this is done, the remainder of the process is passive, except for the portfolio rebalance. Rebalancing ensures that the portfolio is kept up-to-date with the stocks in the strategy. As of now, only US-based strategies are available on the Aikido Finance website.
However, this is soon to change as Aikido Finance will allow users to trade across geographies and markets worldwide. This will open up many new opportunities to investors through new alternative overseas exposures. Many considerations must also be taken with regards to different currencies, legality, changing regulation and taxation issues, and the performance of different markets throughout the last 20 years. Methods on how to diversify your portfolio across geographies will also be discussed.
Currency Exchange Rate Risk
One primary concept to consider when trading quant strategies across geographies and markets is the idea of exchange rate risk. Not only will your investments fluctuate based on movements in asset prices, but will now also differ as the exchange rates between currencies change. Should dollars be your main currency and the dollar grows in strength relative to the euro, this means that your investments in European equities will comparatively fall in value. Taking the approach of diversifying your portfolio between multiple markets such as seen in the MSCI World Index will help to solve the problem of currency exchange rate risk in your portfolio.
As with increasing the number of stocks in your portfolio, increasing your exposure to multiple currencies will lessen the effect of a drastic change in one of these currencies. Therefore, it is important to understand the historical movements of a currency to accurately measure the true historical returns which would have been achieved from foreign-based investment. Choosing to invest in an area where the home currency is growing in value may serve as a useful way to earn a higher return that may be possible domestically.
Another consideration that should be taken into account when trading quant strategies across geographies and markets is the legality and taxation issues involved. The percentage of profits liable for taxation varies from country to country with different dividend income taxes and capital gains taxes. Should an American invest in foreign stock, returns are subject to both capital gains tax and US income tax. Additionally, the American investor may also be subject to certain taxes levied by the company’s home country.
In this instance, the foreign tax credit may be available to the investor which will allow some of the US tax to be offset by the taxes imposed in the company’s home country. Instances of “double taxation” may also occur between different countries in the EU so it is important to consider the tax implications of a foreign investment and how it will affect your after-tax profits. In the case where double taxation occurs, it should also be identified whether tax relief can be claimed.
Performance of Different Markets Across the Globe
Aikido Finance uses the S&P 500 as its benchmark when comparing the performance of their US strategies against the market. This benchmark is chosen as only US equities are included in these strategies and therefore the S&P 500 serves as an accurate indicator for the market return. However, one important consideration for trading quant strategies across geographies and markets is the performance of different markets across the globe. This is especially important when choosing a benchmark to compare against the performance of your portfolio as the market returns will vary significantly across geographies based on various factors.
This can be seen when comparing the performances of the S&P 500 and the FTSE 100 index together. The S&P 500 has experienced a return of over 20% since the beginning of 2021 in comparison to only a 9.5% return for the FTSE 100 in the same time frame. This factor is very important when measuring the performance of your portfolio. In the case of a geographically diversified portfolio, it would not be prudent or accurate to compare your portfolio against the S&P 500 as this only represents movements in the US markets but instead should use a world index such as the MSCI World Index. It would also be prudent to study the historical returns for each geographical area to identify whether certain strategies are more suited to specific regions. It is likely that different quant strategies will have experienced differing levels of success based on the geographical area or market.
Similar to any type of investing, additional considerations have to be taken for the economic climate of the countries you are looking to invest in. Certain strategies may have a proven record of outperforming the market but this is backward-looking in nature. It is important to consider any risks such as political tensions, the passing of new legislation, or changing regulatory requirements which might adversely affect your strategy. Using macroeconomic analysis might help to further identify which strategy would be well suited to a worldwide investment.
Factors such as enduring stability in bond yields and economic recovery following Covid-19 could combine and boost value stocks. Using analysis such as this may indicate which strategy or metric to focus on when choosing and creating your quant strategy. Diversification across geographical regions is also a factor that should be considered. Ensuring your quant strategy is geographically diversified will help to reduce market risk in specific regions and will minimise large swings in your returns. It is also important to ensure that when you rebalance your portfolio, that the geographical weightings remain the same as well as the weightings between the equities.
As can be seen, there are a variety of considerations that should be taken into account when trading quant strategies across geographies and markets. The main concerns include currency exchange rate risk, taxation issues, different historical performances across geographical sectors, and regular risks such as market, political and regulatory risk.
This blog also highlights the importance of choosing an accurate benchmark when comparing the performance of your geographically diversified portfolio against the market. When these considerations are taken, investing quantitatively across foreign markets can be of huge benefit. Such an approach will be available on the Aikido Finance website which will soon be branching out from exclusively US equity strategies to include foreign equities from across the globe. Investing in such a quantitative manner has historically been proven to outperform the market on a consistent basis and this passive investment process has been made even easier through the Aikido Finance website which offers a variety of pre-made quantitative strategies to meet each individual investors preference.