New Industry Classifications with Implications for Equity Long-Short Portfolio Construction
Using statistical topic modeling, we formulate a new mechanism for sector and industry classifications based on SEC 10-K filings, which we call TOPICS. We show that the TOPICS classifications are significantly better than the GICS classifications at explaining stock return co-movements, as well as cross-sectional variations in valuation multiples, forecasted and realized growth rates, research and development expenditures, and various key financial ratios. Additionally, within each of our TOPICS sectors we construct a sector neutral investment strategy in the form of an equity long-short (L/S) portfolio. We perform comprehensive studies of the TOPICS sectors and master portfolios in the S&P 500 against the equivalent portfolios based on the GICS classifications. We show that the TOPICS sector portfolios systematically outperform those of the GICS sector portfolios in risk adjusted returns. We conclude with a framework that explains why the TOPICS classifications exhibit improved L/S equity portfolios performance over the GICS classifications.
Dr. Awada has over two decades of success in investment performance, risk mitigation, asset allocation, and academics. He was a founding member of the Morgan Stanley Quantitative Equity and Convertible Bond trading program. Subsequently, he held leadership and executive positions at some of the top Investment banks in the industry, including serving as Head of Quantitative Development in Equities and Trading at Chase Manhattan Bank, Global Head of Quantitative Modeling and Trading at BNP Paribas, and serving as Global Head of the Multi Asset Systematic Trading group at Dresdner Bank. Dr. Awada then founded Sunofia Group, an Investment and Advisory consortium with companies in Singapore, UK, and the US; and Sunofia Quantum systematic funds in the Cayman Islands, where he was Managing Director and CIO. Mark Antonio was later a senior portfolio manager at Balyasny Asset Management before joining Alpha Innovations as Chief Risk and Investment Sciences Officer.
In addition, Dr. Awada is the Head of Research and Data Science at the D^3 Institute at Harvard, the Harvard Business School, and Affiliate Professor in Theoretical Physics at Florida Atlantic University (FAU).
Dr. Awada earned his PhD in Theoretical Physics from Imperial College, UK, and later performed post-doctoral research with Stephen Hawking on unification theory at Cambridge University. Additionally, he was a Research Professor in Theoretical Physics at University of Cincinnati.