AlphaEdge Capital uses a daily return forecasting model to rank U.S. equities and construct a market-neutral long/short portfolio. The model's raw prediction accuracy looks acceptable, but portfolio performance has weakened after transaction costs and recent market volatility.
| Metric | Validation Period | Last 3 Months Live | Baseline Strategy |
|---|---|---|---|
| Annualized Return | 14.2% | 9.1% | 6.8% |
| Annualized Volatility | 10.5% | 11.8% | 7.4% |
| Sharpe Ratio (rf = 2%) | 1.16 | 0.60 | 0.65 |
| Max Drawdown | -6.1% | -9.4% | -5.8% |
| Hit Rate | 54.8% | 53.9% | 51.2% |
| RMSE of Return Forecast | 0.021 | 0.024 | 0.027 |
| MAE of Return Forecast | 0.014 | 0.016 | 0.018 |
| Avg Daily Turnover | 18% | 27% | 9% |
The CIO is concerned that the model still beats the baseline on raw return, but its live Sharpe ratio has fallen below the baseline strategy. The team needs to determine whether the model is still adding value on a risk-adjusted basis and what changes would improve deployment quality.