Revenue Nowcasting: Improving Sharpe through Mean Reversion

AKAnomics delivers Revenue Nowcasting estimates to both fundamental and quantitative hedge funds. A natural question asked by “quant” funds is if AKAnomics signals can be defensibly combined with other quant signals to further improve risk-adjusted returns. We believe that Mean-Reversion is one such signal.

It makes sense to us that if a company’s price has recently gone up significantly (from its historical average), then a positive expectation for revenue surprise is unlikely to deliver as much of a return compared to a company where the price has gone down significantly. Based on this idea, we show that combining the current quarter Revenue Surprise signal generated by AKAnomics with the Mean-Reversion signal for the company, can significantly improve returns.

Given that AKAnomics signals are updated weekly, we base our Mean Reversion signals on past one week’s returns relative to the company’s past 26-week average. Standardizing and averaging this Mean Reversion signal with AKAnomics Revenue Surprise signal, shows annualized sector-neutral returns of 8.4% with Sharpe of 1.8 in the point-in-time data (paper portfolio returns based on 40 top surprise signals each week, starting Dec 2022, excluding trading costs, see chart below). A similar level of improvement in Sharpe can be noted for the backfilled history (starting 2015).

While it is difficult to disentangle the contributions of each of the signals in the strategy, we find that the Sharpe for the combined signal is close to the Euclidean distance between the sharpes for each of the signals independently, suggesting that the two signals are fairly uncorrelated. Given that there is limited academic literature available on fundamental equity Nowcasting signals, we believe this analysis is new and would be valuable to “quantamental” strategists.

Our sector-neutral strategy is discussed in our whitepaper here (https://www.akanomics.com/resources/akanomics-inc.-point-in-time-returns-analysis), and the value of Revenue Surprise signal is discussed here (https://www.akanomics.com/post/the-value-of-revenue-nowcasting-in-systematic-strategies). If you are a quant, or long/short equity analyst, and would like to learn more, please contact us at info@akanomics.com