Using Bluemix to Find Alpha in Unstructured Data

Prashant Bhuyan, Co-Founder

IBM Interconnect 2016

What is Alpha Modus?

An investment technology company founded in 2014 to find alpha in

unstructured data and reprice investment advice

What is Alpha?
Risk adjusted return in excess of a benchmark

Compounding growth with low volatility

More alpha = faster growth

Re-pricing Investment Advice

Underperformance
Negative alpha
Disproportionate fees
Investors should only pay for alpha!
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Why is Generating Alpha So Difficult?

Every day we create 2.5 quintillion bytes of dataSo much that

90% of the worlds data has been created in the last 2 years
alone. (IBM)

Too Much Noise

Traditional methods dont work

Markets increasingly driven by psychology

Identify cognitive biases and trade against them

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What Alpha Looks Like

Are Imbalances Predictive?

Can imbalance indications predict market direction into the
close of trading? (Original question posed ~5 years ago)

An Imprecise Predictor

More Sophisticated Questions

Vola%lity Skew

Experimen)ng with more sophis)cated ques)ons using Bluemix and Watson!

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Does News Sentiment Improve

Accuracy?

Do imbalances & negative news predict the direction of the

S&P 500 better than imbalances alone?
Build a corpus of news articles related to the stock market
http://www.federalreserve.gov/monetarypolicy/fomcminutes20150729.htm Federal Open Market Committee
https://www.markiteconomics.com/Survey/PressRelease.mvc/7ceb45947dbf4d4f9b56e9d0c7439c41
http://www.cbsnews.com/news/this-morning-from-cbs-news-august-24-2015/
http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2015/Geschaeftsklima-20150825.html
...

Build a sentiment parser using Alchemy

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Build a Sentiment Parser (Step 1)

Select Node.js platform to build sentiment parser

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Sentiment Parser (Step 2)

Select Command Line Interface

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Sentiment Parser (Step 3)

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Sentiment Parser (Step 4)

Add cogni3ve services, congure resources

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Formal Hypothesis
Null Hypothesis:
Negative news and negative imbalances do not predict market
direction into the close better than the 1 factor imbalance model.
Alternative Hypothesis:
Negative news and negative imbalances do predict market direction
into
the close better than the 1 factor imbalance model.

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Collect Sentiment Data

Extract keywords, relevance and sentiment

Map (negative, positive) sentiment to (-1, 1)

Weight keyword sentiment by relevance

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Build Explanatory Factors

Average relevance weighted negative sentiment (per day)

Negative keyword count

Market on close imbalances

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Build a Multi-Factor Model

Multi-factor model:

Reduce dimensionality & co-linearity using PCA:

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550% More Accurate

2-factor model using principal components:

2-factor model explains > 55% of variance in response variable

Reject null hypothesis: Negative news and imbalances are more

predictive of market direction into the close than imbalances alone
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Weak Market
General market falling sharply into close (Feb 5, 2016)

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Key News Items

Relations extracted from a news corpus using Alchemy:

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Keyword Sentiment
Extracted relevance weighted keywords

Weighted sentiment in gold is strong indicating flight to safety

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Making Money

For informa)on purposes only.

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Takeaway
$64 trillion asset management has gone cognitive

Asset managers are drowning in information

IBMs cognitive apps unleash the creativity required to find alpha

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THANK YOU!

Prashant B. Bhuyan
Alpha Modus
Co-Founder & Chief Technology Officer
pbhuyan@alphamodus.com
@Prashant_Bhuyan

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