AI Crypto Hedge Fund Leading the Way: Momentum Trading Generates Outsized Returns

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Peter Borovykh bio:

Peter Borovykh is a renowned blockchain and cryptocurrency expert, who has spoken at numerous blockchain conferences such as New York FinTech Week, NameSummit, and the upcoming Boston-based blockchain conference, The Blockchain Technology Conference & Workshop, where he will instruct an exclusive day-long seminar that teaches attendees the ins and outs of blockchain and cryptocurrency trading.

He has been featured in Business Insider, Yahoo Finance, Inside Bitcoins, BTC Manager, and more. He is the author of “Blockchain Applications in Finance”, a Solutions Architect at BlockchainDriven, and is the Head of Algorithmic Trading Strategies at the AI crypto fund, AxionV.

AI Crypto Hedge Fund Leading the Way: Momentum Trading Generates Outsized Returns

Momentum trading has been a fairly novel concept that has evolved out of cyclical and structural patterns in the global economy. With globalization, capital has increased liquidity to a level that facilitates sector specific or category growth. Scholars have been studying and writing on momentum strategies since the early 90’s. One of the most widely known studies by Jegadeesh and Titman found that taking a position (long or short) in the top tier stocks over the past 3, 6, 9, or 12 months resulted in proven gains above the S&P benchmark. The strategy will typically outperform the broader market by 1 percent per month after holding each portfolio for 3, 6, 9, or 12 months respectively.

Once a minimum number of ideal assets are achieved in a portfolio, the concept illuminates the power law distribution, whereby profit increases as the number of stocks or assets in the portfolio stabilize at an optimal level. Empirical research by Foltice and Langer found that after factoring in transaction costs and risks, “the highest returns and monthly alphas are obtained by buying the top five to eight of the top performing stocks of the previous 6-month holding period.” These and many similar studies found substantial statistical edges momentum strategies could add to active investors.

By implementing the previously mentioned momentum strategy on cryptocurrencies, above average returns are expected, as you can see in the graph above, which shows the above average returns associated with momentum investing, even with as few as two cryptocurrencies being used. The benchmark showed a solid return percentage, but it was dwarfed by the momentum baskets, which all saw impressive returns across the board.

We begin by introducing a similar model for the top performing crypto assets and companies backed by crypto-based currencies which yield a similar outperformance on an absolute and risk adjusted basis. In our present day, crypto assets are still at an initial stage of development with low levels of liquidity, high volatility, high rates of commission and limited scalability for institutional capital. Perhaps the best analogy is to the Wild West or an emerging currency like the Japanese Yen or the South Korean Won prior to their rapid economic development.

Momentum investing strategies include assets that outperformed and/or underperformed in the previous period in the expectation that the trend will continue further and into the next period. Thus, there are two main considerations when it comes to momentum trading: the optimal size of the basket of outperforming and/or underperforming assets, as well as the longevity of the period timeframe. Since the number of liquid crypto-based assets in the current stage of market development is somewhat limited, we can alleviate the first consideration and only focus on the second.

As you can see in the graphs above, momentum investing strategies applied to the crypto space drastically outperformed already aggressive returns posted by cryptocurrency benchmarks. Our analysis confirmed a generally observed notion that active investing is often times more lucrative compared to passive investing in growth markets with above-average levels of volatility. As volatility levels stay high, strategies such as momentum investing have a very good potential to outperform the general market showing abnormal absolute returns coupled with acceptable levels of Sharpe ratio.

The study of momentum investing strategies described in “Profitable momentum trading strategies for individual investors” by Foltice and Langer concluded that “the point yielding the highest Sharpe ratio against the benchmark, at which the trade-off is the greatest, [ranges] from bi-yearly to monthly trading”. Given the rapid evolution of the crypto space, with new assets coming to market every week, the traditional six-month rebalancing period would be too long, and semiannual rebalancing would prevent us from taking advantage of new market opportunities. On the other hand, monthly momentum rebalancing would be impractical given high intra-day volatility, low liquidity, and high bid-ask spread and trading fees.

Our extensive research included a variety of trading portfolios to gain a better understanding of the nature of cryptocurrencies and present a larger pool of investment opportunities for investors. We discovered that momentum investing is not only a viable option, but it is very effective. This is where our confidence in AxionV comes from.

 

AxionV is an AI crypto fund that uses momentum investing and Artificial Intelligence to consistently outperform the cryptocurrency market. The issues currently facing human cryptocurrency investors is that we, as humans, are very limited in how much time we can spend on trading. Applying AI to crypto trading allows the AxionV fund to be constantly testing strategies and trading, achieving better returns than humans can. The team assembled consists of blockchain and cryptocurrency experts along with investment experts like myself. It’s been exciting to watch the buzz around our project grow, and I’m excited to watch the AxionV vision come to fruition when our ICO begins on September 16. We’re always working on new strategies and tactics of taking trading to the next level. You can follow AxionV’s crypto trading journey on our blog.