What Is Opus: Opus Systematic Investing
Technology and data have always been the answer
Since the advent of markets, investors have used technology to incorporate data for an edge. In the 17th century, shortly after telescopes became available, Dutch traders watched ships coming into the port, using the level of the ship in the water as a signal for the amount of commodities onboard. A low-riding ship meant a large delivery that would push prices down once it was brought ashore and put up for sale .
In 18th century Japan, after trading in rice futures was allowed, Yomiji Sumiya developed a systematic process for incorporating prices from the Osaka exchange before anyone else had the information. Yomji had a messenger run from the market in Osaka to a mountain pass where Yomji could read the messenger’s hand signals using a telescope .
As financial markets have matured and technology improved, the methods of incorporating data to improve decision-making have evolved. Jim Simons, the founder of Renaissance Technologies (Rentech) and father of modern systematic investing, launched the quantitative investing revolution. His hedge fund, Medallion, is famed for having the best track record on Wall Street, delivering 66% per year from 1988 through 2018 before fees . Writer Gregory Zuckerman, who wrote a New York Times best seller about Simons and Rentech, noted:
“Simons decided to treat financial markets like any other chaotic system. Just as physicists pore over vast quantities of data and build elegant models to identify laws in nature, Simons would build mathematical models to identify order in financial markets.”
Simons and his team started in currency markets where they used simple trends to make decisions, buying assets if they moved a certain level below recent trend and selling if they veered too far above it .
Around the same time as Simons was starting the firm that would become Rentech, Ray Dalio was trading commodities for his upstart company, Bridgewater. Dalio was similarly driven by a desire to make sense of financial markets using a systematic approach. In those early days, Dalio did regressions on a handheld Hewlett Packard HP-67 Calculator, plotted charts by hand, and recorded every trade in composition notebooks . In his Principles book, Dalio recounts how his early computerized decision-making models “could process vastly more information than I could, and it could do it faster and unemotionally.” Bridgewater Associates is now the world’s largest hedge fund by assets, with over $100 billion in assets under management .
Composer is working to revolutionize retail investing
Composer follows the path laid out by the Dutch traders, Yomji, Simons, and Dalio, using technology and data with the goal of achieving superior returns. Our investment strategies respond to evolving market conditions based on logic and data. This rules-based approach reduces emotional decision-making and manages risk, allowing investors to invest for the long-term with confidence .
Since its launch, the Composer platform has allowed investors to build their own quantitative strategies or invest in strategies created by Composer. These dynamic strategies are called symphonies.
Opus is a single portfolio solution
As Composer has grown and added new functionality, we have always strived to make sophisticated investing easy. For many investors, the easiest way to invest is through a single strategy that is balanced and aims to deliver long-term growth. That is why we are excited to announce the launch of Opus. Opus is an actively managed multi-strategy solution that builds on Composer’s powerful technology and leverages our investment team’s best thinking.
As we have seen time and again, markets are dynamic, and each new regime presents challenges and opportunities for investors. The last ten years have been marked by negative stock-bond correlations and strong performance for risky assets; however, that regime is likely changing. Inflation, growth uncertainty, rising interest rates, increased volatility, and geopolitical conflict demand a new, forward-looking approach to portfolio construction. Opus combines systematic rules and a structured investment process to navigate uncertainty and changing economic conditions.
Technology makes Opus possible
Outside of expensive and often exclusive hedge funds, retail investors have had limited access to portfolios that employ systematic investment strategies, portfolio optimization, and rigorous risk management.
So, what makes Opus possible? First, the growth of Exchange Traded Funds (ETFs) and the related infrastructure for trading asset classes as easily as individual stocks. The ability to trade stocks, bonds, commodities, and currencies with relatively low transaction costs increases the universe of possible strategies. Compared to traditional alternatives like hedge funds, which are generally expensive, opaque, and illiquid, Composer can build low-cost, highly transparent, and liquid strategies.
Second, the new technology developed by Composer creates a superstructure for strategy creation, testing, and ongoing management that allows the investment team to manage Opus in a lean and cost-effective way. What used to require extensive coding, specialized backtesting software, and groups of traders can now be accomplished with the Composer platform.
Opus is built on foundational investment principles
Retail investors have struggled to incorporate diversifying strategies into their portfolios, instead focusing on stock and bond dollar allocations (e.g., 60% stocks and 40% bonds) for simplicity . To push beyond these challenges and create a portfolio that is differentiated and enduring, Opus begins with “first principles.”
Four core beliefs underpin our investment philosophy
Systematic strategies and data-driven portfolio construction improves decision-making
Diversification improves risk-adjusted returns
Risk management is critical for long-term wealth creation
Costs and incentives matter
We believe a systematic and data-driven approach improves decision making
Let’s start with how systematic investing is different. Systematic investing uses rules to govern portfolio management. For example:
If the current price of the S&P 500 is above its 200-day moving average, buy SPY.
Buy the top two stocks from a list based on their previous three-month performance.
Weight the portfolio based on volatility, giving the smallest weight to the riskiest assets.
These are examples of objective rules that can dictate investment decisions. Systematic investing is also called quantitative or algorithmic investing. Many of the world’s largest hedge funds employ systematic investment strategies, and as of 2018, almost $1 trillion was managed systematically .
In contrast to systematic investing, discretionary portfolio management generally involves deep fundamental research on a smaller number of assets and decision-making based on human judgment. While both investment approaches have their merits, we believe systematic investing has several benefits that allow Composer to deliver value to our investors.
So, why do we believe systematic is better for retail investors? First, systematic strategies take advantage of the data available in financial markets. Returns, volatilities, moving averages, Treasury yields, factor returns, valuations, and hundreds more elements can be incorporated into portfolio construction, informing strategy selection and relative weights. Further, because systematic strategies follow objective rules, they can be backtested, refined, evaluated relative to alternatives, and tested in out-of-sample data sets. This data-driven approach should lead to robust portfolios well-suited for the volatility of financial markets.
Second, systematic investing allows Composer to keep costs low for our clients. Traditional discretionary portfolio managers employ considerable research and trading teams to build portfolios, passing the costs for these resources onto their clients in the form of higher management fees. Composer can automate portfolio execution using our proprietary platform, reducing the need for a large trading team. In addition, our no-code visual editor makes it easy to develop and test new investment strategies, dramatically reducing the time and resources it takes for a strategy to go from research topic to implementation. These benefits enable us to manage portfolios with a lean cross-functional team and keep structural costs low for our clients.
Lastly, systematic investing codifies the investment process and helps avoid emotional decision-making. As discussed above, systematic investing focuses on designing rules for portfolio management. At Composer, these rules are clear, transparent, and have a compelling rationale. For example, research in behavioral economics has documented that investors over- and underreact to fundamental news . We seek to exploit this bias by employing momentum and trend-following strategies. By explicitly creating clear processes, returns are driven by economic exposures, diversification, and risk management instead of the “gut” of the Investment Committee.
Diversification is king
The idea of diversification is simple: add assets that zig when other assets zag, and the overall variability of the portfolio decreases. Using the correlation matrix below, we can evaluate how asset classes, represented by ETFs, move with each other. ETFs with low (close to zero) or negative correlations are more likely to move in opposite directions.
To illustrate the point using backtested data, an equity portfolio comprised solely of SPY should benefit from adding the ETFs with the lowest correlations: UUP, GLD, and BND. Adding these ETFs one at a time into an equal-weighted portfolio shows the improvement in Sharpe Ratio after each addition. By contrast, adding together four highly correlated stock ETFs has almost no effect on Sharpe ratio.
THE BENEFITS OF DIVERSIFICATION FOR PORTFOLIO SHARPE RATIO
Unfortunately as discussed above, retail investors have narrowly focused on stocks, bonds, and cash within their portfolios, limiting the potential to diversify. Over the past decade, investing in stocks and bonds may have been sufficient because bonds were an excellent diversifier to equities. A traditional 60% equities and 40% bond portfolio returned 8.2% with 11% realized volatility from 2004-2021 . This period was marked by accommodative policy from the Federal Reserve and persistently low inflation.
However, this regime may be changing, and the relationship between stocks and bonds evolving. Research from AQR, Bridgewater, and DE Shaw points to a dynamic correlation between stocks and bonds . This relationship is influenced by inflation, growth expectations, and individual stock characteristics (e.g., sector, size).
Opus helps investors diversify their portfolios in ways they may not have considered by expanding the investable universe beyond stocks and bonds. With ETFs, asset classes are more accessible at lower costs than ever. Opus sub-strategies include stocks, bonds, commodities, and currencies, allowing us to seek better risk-adjusted returns.
Risk management is critical
Opus is managed with a rigorous focus on risk management, incorporating three methods that were traditionally difficult to implement for retail investors: volatility targeting, regular rebalancing, and position limits.
THREE METHODS OF RISK MANAGEMENT BUILT INTO OPUS
Costs and incentives matter
As the late, great Jack Bogle said, “In investing, you get what you don't pay for. Costs matter.” The higher the fee for a fund, the more manager skill is required to generate returns above the benchmark to compensate for those fees. According to Vanguard, paying 2% fees like those on hedge funds reduces portfolio earnings by 40% over a 25-year period . By keeping costs low, Composer can ensure investors keep more of their portfolios’ returns and are able to grow their wealth over time.
Secondly, it is a cardinal rule of economics that incentives drive behaviors. By aligning our incentives with our investors, we aim to create a win-win situation. In the case of Opus, clients pay a flat subscription fee for the Composer app, and there is no management fee for the portfolio. This simple fee structure means that investors are not penalized for investing more of their wealth in the symphony as they would be if we charged a percentage of assets.
In addition, Composer and members of the Investment Committee invest alongside our clients in the Opus strategy. Morningstar research demonstrates that portfolio managers with meaningful investment in their strategies outperform managers without investment. Further, Nassim Taleb’s book Skin in the Game demonstrates that having a measurable risk when making a major decision (such as capital allocation)—is necessary for fairness, commercial efficiency, and risk management, as well as being necessary to understanding the world. At Composer, we eat our own cooking.
Composer’s process is simple and robust
We strongly believe that a robust and repeatable process is key to successful investing. Indeed, the value of Opus comes from process and technology, which improves upon what has been available to retail investors previously. The investment process is divided into three steps: strategy creation, portfolio construction, and ongoing management.
Systematic strategies leverage the Composer platform
The foundation of Opus is a collection of systematic strategies built on the Composer platform. These strategies leverage the no-code visual editor for construction, the backtesting tool for testing and refinement, and automated trading for implementation.
Strategies are developed for each asset class within our investable universe: stocks, bonds, commodities, and currencies. These strategies seek two objectives: (1) exposure to the asset class’s expected return (i.e., beta) and (2) enhanced risk-adjusted returns through documented anomalies.
To ensure strategies are impactful within Opus, we evaluate three criteria:
Exposure (i.e., quality of exposure to a factor or risk premium)
Differentiation (i.e., uniqueness of its return profile)
Fit (i.e., correlation to other strategies)
Based on these criteria we selected five initial strategies for inclusion in the Opus Symphony.
Efficient Core. The core of Opus is the same as our benchmark: 60% stocks and 40% bonds [See Appendix]. However, this sub-strategy uses modest leverage to provide capital-efficient exposure to stocks and bonds. Capital efficiency means we can use fewer dollars to achieve the desired return from the underlying 60/40 strategy, allowing for larger allocations to diversifying strategies at the portfolio level.
Sector Momentum. Momentum is a well-researched anomaly within financial markets where assets that are performing well continue to do so and underperformers continue to lag. This strategy looks at the sectors composing the S&P 500 and selects the two that have performed best over the past 200 trading days.
Large Cap Value. Value investing involves buying stocks that appear to be trading at less than their fair or intrinsic value. Historically, value investing has delivered returns in excess of the broad market. In addition, value stocks look attractive relative to growth stocks based on historical measures, and value investing is a good diversifier to momentum strategies.
Commodity Momentum. Following simple trends in commodities has demonstrated improved risk-adjusted returns relative to buy-and-hold strategies. This sub-strategy compares commodity performance to short-term treasuries and invests in commodities when they are trending well.
Volatility Hedge. This sub-strategy combines managed futures, gold, and currencies because they have historically offered diversification benefits relative to stocks and bonds. This sub-strategy offers a ballast in times of market volatility. Note: this sub-strategy does not invest in options or other long-volatility assets that have a direct inverse relationship with volatility (i.e., assets that go up when volatility increases).
Finally, the Investment Committee continually develops and tests new strategies. The universe of potential strategies will grow over time in response to evolving market conditions and new methods of exploiting market anomalies. Strategies may enter and exit Opus over time depending on their relative attractiveness and correlation with other strategies.
Opus sub-strategies perform well in a simple backtest
Below, we show a simple equally-weighted portfolio of the five selected sub-strategies over the past three years. Please see the appendix for important disclosures on backtested performance. This naive strategy demonstrates the benefits of holding the sub-strategies before Opus layers in active rebalancing and risk management.
Portfolio construction incorporates technology and expertise
Opus is constructed to meet its goals over the upcoming 12-month period, and the sub-strategies and target weights are evaluated and rebalanced each quarter. The Investment Committee meets on the first Monday of a new quarter to evaluate changes. During these quarterly rebalances, we follow a structured process, documenting our investment outlook, tracking changes suggested by our model, and defining metrics to measure the effectiveness of our decisions. Portfolio rebalances are completed on the first Wednesday of the quarter.
We place several constraints on Opus for risk management and operational reasons. The strategy does not short securities or apply leverage at the portfolio level; however, the strategy may use leveraged or inverse ETFs to achieve its return objectives. Opus restricts sub-strategies to 25% of the overall portfolio, except for Opus–14 which has a position limit of 40%.
We seek to maximize the Sharpe ratio for a set volatility level (i.e., maximize returns for a given level of risk). To that end, we optimize sub-strategy weights to provide the best risk-return profile over the next quarter. To determine the appropriate weights, we consider returns, correlations, and volatility, using traditional portfolio optimization techniques (e.g., minimum-variance optimization).
If necessary to achieve our target volatility, we augment the selected strategies with a Cash Substitute strategy that can be scaled up or down to manage the aggregate volatility. The Cash Substitute strategy includes short-term treasuries, short-term TIPs, and T-Bills weighted by inverse volatility. We monitor ex-ante and ex-post volatility on a weekly basis and adjust the Cash Substitute strategy weight during quarterly rebalances as necessary to ensure Opus achieves its desired volatility.
Lastly, the Investment Committee adds a qualitative overlay to sanity-check the results and ensure decisions have a sound financial foundation. When Opus is rebalanced, the Committee considers economically motivated reasons for asset class performance and the impact current market conditions will have on sub-strategies. For example, during periods of high dispersion in equity market returns, strategies such as Sector Momentum have a higher probability of differentiated returns relative to the overall market. However, when equity market performance is broadly consistent across sectors, holding the market portfolio likely delivers similar returns with less turnover.
Outside of quarterly rebalances, fund performance is evaluated daily, and the investment team meets weekly to discuss attribution at the aggregate and sub-strategy levels. In addition, ex-ante and ex-post volatility are closely monitored on a weekly, monthly, quarterly, and annual basis.
Sub-strategies are implemented with Composer’s automated trading technology, and each strategy trades independently based on its own logic and individual holdings. If a sub-strategy generates a trade or the Investment Committee enters a quarterly rebalance, market orders are sent between 3:00 and 4:00 pm to be executed. Further, an intra-quarter rebalance can be triggered by a significant drawdown in the S&P 500, a dramatic move in the US Treasury curve, or an increase in realized volatility above target levels.
An Opus portfolio for all risk tolerances
Investors have different goals and risk tolerances with their investments. To address these unique needs, we offer three flavors of Opus.
Each version of Opus targets a specific volatility level measured by annualized standard deviation. Investors comfortable with more volatility can select the Aggressive Opus strategy while those looking for less variability can opt for the Moderate or Conservative strategy.
Investing evolves, and so does Opus
A telescope wouldn’t get you or your portfolio very far today. But in the 17th century, it was groundbreaking. The technology needed to excel in financial markets is constantly evolving. Opus builds on Composer’s technology to deliver a simple way to invest systematically, aiming to give the upper hand to retail investors. An opus refers to an artistic work or a set of compositions, and in that vein, Composer’s Opus packages together a set of sub-strategies in a single automated solution. Investors can enjoy the benefits of innovative technology and the simplicity of a professionally managed portfolio.
Create a Composer account today to begin investing with Opus.
Opus is run by Composer’s Investment Committee, a cross-functional team of data science, computer engineering, and investment management professionals.
Benjamin has over a decade of experience in product and data science leadership roles. He was previously VP of product and data science at Breather, a workspace as a service company. Ben has been an active trader and investor since he was a teenager and founded Composer in response to his own frustration with the difficulty of implementing automated trading strategies. Today, Composer has 14 employees and has raised funding from tier 1 investors, including First Round Capital, Left Lane Capital, Alumni ventures, and Packy McCormick’s Not Boring Fund.
KYLE BIRMINGHAM, CFA
Kyle began his career at Vanguard, where he held roles in strategy and investment management, including overseeing Vanguard’s multi-billion dollar active equity value-oriented franchise. He joined Composer in January of 2022 as an investment strategist, focusing on portfolio research, strategy development, and market analysis. Kyle graduated from the University of South Carolina magna cum laude and With Honors and earned his MBA from the University of Chicago’s Booth School of Business with honors. Kyle is a CFA charterholder.
WILLIAM LIU, CFA
William is a Software Engineer at Composer and supports the trading infrastructure. Before joining Composer, William was a quantitative developer at a Silicon Valley hedge fund, where he focused on systematic trading infrastructure, including developing backtesting technology. Previously, he held various Software Engineer roles in capital markets and fintech. William graduated from the University of Waterloo with a Bachelor of Computing and Financial Management and is a CFA charterholder.
Opus is benchmarked to a traditional balanced portfolio
Given its goal of long-term growth and volatility management, we selected the traditional balanced portfolio of 60% equities and 40% bonds as Opus’ performance benchmark. More specifically, the benchmark is 60% Vanguard’s Total Stock Market ETF (VTI) and 40% Vanguard’s Total Bond Market ETF (BND) rebalanced quarterly. In selecting a benchmark for Opus, we sought to incorporate best practices from the CFA Institute as well as make the benchmark easily understandable for our investors. A 60-40 portfolio meets the CFA Institute’s principles of unambiguous, investable, measurable, appropriate, and reflective of current investment opinions (CFA Institute).
Opus will seek to deliver better risk-adjusted returns and lower drawdowns than the 60-40 portfolio over a rolling 12-month period.
The hypothetical performance of sub-strategies
Results in the table represent hypothetical performance and are not indicative of actual performance that an investor may experience. All backtests are estimations of how the model will perform over time, in certain market environments, and are not an indicator or recommendation of any individual trading decisions either in the past or the future. Past performance is not indicative of future results.The five sub-strategies, including their assets and logic are available for review below:
Backtests are calculated using adjusted close prices, while live trading strategies are executed between 3:00 pm to 4:00 pm. Prices are sourced from our data partner Xignite, and returns are calculated by Composer. Returns include reinvested dividends but do not include monthly Composer fees which are $30 per month or $288 per year. Opus may experience losses as well as gains, and, at times, may be more volatile and have a lower Sharpe ratio than its benchmark.
Backtested results do not represent actual trading and may not reflect the impact that material economic and market factors (e.g., liquidity impact on execution costs). In our backtest we estimate that bid-ask spreads and liquidity impact are 5 basis points on each trade, but actual results could vary substantially from this estimate.
Avoiding overfit strategies
Overfitting is a key consideration with systematic strategies. We take several steps to avoid overfitting in our underlying strategies. First, each strategy is tested for robustness by evaluating how sensitive it is to changes in its parameters. For example, if a momentum strategy’s lookback period is changed from 100 days to 110 days and performance is materially worse, the strategy could be overfit to the existing data. However, a strategy that delivers relatively consistent returns with slight changes to its parameters is more likely to be robust. Second, in creating and testing new strategies, the Investment Committee strongly favors simple strategies with clear rationales for delivering outperformance. In our view, a simple strategy with lower backtested returns is better than a complex strategy with higher returns [The Dog and the Frisbee].
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