With an $11 billion annual IT budget, it’s little surprise BofA is also giving machine learning technologies a spin under the watchful eye of the digital innovation group. The first crop of products to market include the Dynamically Diversified Momentum (DDM) index. Live since mid-2018, the strategy aims to address another conundrum – the so-called ‘Curse of Markowitz’. Nobel prizewinning economist Harry Markowitz quantified the benefits of diversification in his pioneering work in the 1950s, which remains the basis of modern portfolio theory.
As asset pools get larger, however, this diversification benefit can erode as short-term momentum signals create noise that can work against the strategy. DDM addresses this using clustering techniques to divide the investment universe into buckets of similar risks, loosening dependency on correlation estimates and uncovering hidden alpha.
As asset pools get larger, however, this diversification benefit can erode as short-term momentum signals create noise that can work against the strategy. DDM addresses this using clustering techniques to divide the investment universe into buckets of similar risks, loosening dependency on correlation estimates and uncovering hidden alpha.
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