Tactical Equity Allocation Using Conference Call Sentiment Indicators

THEORETICAL BACKGROUND 

The dialogue between management teams and Wall Street analysts on earnings conference calls is an important tool for information dissemination from asymmetrically informed management teams to the investing public.  This data point is primarily used by fundamental analysts to understand the current issues concerning a public company’s performance.  However, the linguistic content of these dialogues can also provide valuable quantitative data points if the market is not fully efficient in immediately digesting positive and negative stories.  Route 3 Capital and its predecessor firm, HudsonView Capital Management, have worked to prove this is the case, by quantifying and employing sentiment measures from these conference calls to predict security returns.

Sentiment Average Construction 

Route 3 Capital uses proprietary measures of conference call sentiment to systematically guide short to medium term tactical equity allocation for managed account clients.  To this end, the firm maintains short and medium term moving averages of sentiment for industry ETFs using weighted sentiment scores of constituent company conference call dialogues.  The following chart shows clear delineation in next day returns (morning to morning) in four beta driven industry ETFs by percentile of the sentiment averages:

Average Next Day ETF Returns by Sentiment Score Percentile

   

TACTICAL ETF STRATEGY BACKTEST

In November 2012, Route 3 began live trading its Tactical ETF Strategy.  The model is systematic, using the sentiment averages to determine a long, short, or neutral position in each ETF each trading day.   Route 3 used minute bar pricing data from TickData, adjusted for dividends, and the Deltix QuantOffice strategy development environment utilizing TimeBase’s integrated message bus to backtest the strategy from Jan 1, 2007 through the present.  The risk adjusted returns are encouraging and, with a negative 21% monthly correlation to the S&P 500, show particular value as an equity hedge or short-bias strategy:

Tactical ETF Strategy: Backtested Model Time Series (1/1/2007 – 1/31/2014),  $10m starting equity)

 

Tactical ETF Strategy: Backtested Monthly Returns (1/1/2007 – 1/31/2014)

 

 

Tactical ETF Strategy: Backtested Summary Performance Data (1/1/2007 –1/31/2014)

 

 

Principal- Joseph Graham, CFA

Joe currently operates Route 3 Capital and is a Senior Risk Officer at LibertyView Capital Management.  He most recently founded HudsonView Capital Management, which developed quantitative testing systems and research related to linguistic signals.  The company used this research to manage systematic long/short strategies for a prominent Geneva-based family office.  Prior to HudsonView, Joe was part of the SPAC portfolio management team at Millennium Partners.  Joe’s team was one of the largest SPAC common and warrant investors from 2008 to 2010.  Prior to Millennium, Joe was an Analyst and Portfolio Manager at LibertyView in the equity group, focusing on private placements, merger arbitrage, and SPACs.  He has an MBA with honors from the Wharton School of Business at the University of Pennsylvania and graduated summa cum laude with majors in Finance and Philosophy from Washington University in St. Louis.

Contact info:

Email: jgraham@route3capital.com

Phone: 646-660-3167

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The Deltix Quantitative Research Team