The Quant Model Behind Hoperation Fund’s Market Outlook

At every Hoperation Fund monthly meeting, we conduct a market analysis, providing both a long-term and mid-term market outlook. Sometimes the long-term market direction is bullish, sometimes neutral, and at times bearish, as shown in the meeting slide below. But how do we determine this outlook?

Our long-term market direction is generated by a quantitative model used in the Hoperation Fund. At the end of each month, this model integrates a vast amount of data to predict whether the next month is likely to be bullish or bearish.

To evaluate the model's performance, we apply its bullish/bearish signals to an investment strategy using SPY, the S&P 500 Index ETF. The strategy follows a simple rule:

• If, at the end of current month, the model determines the next month is bullish, then we invest 100% in SPY in the next month;

• If, at the end of current month, the model determines the next month is bearish, then we hold cash in the next month;

We backtested this strategy from 1993/3 to 2025/2, comparing its final portfolio balance against a buy-and-hold SPY strategy. The results are shown in the figure below.

In the top part of the figure:

• The blue line represents portfolio growth using our quant model-based strategy.

• The orange line represents a buy-and-hold SPY strategy.

A key observation is that the blue line experiences smaller drawdowns—meaning fewer steep portfolio declines—whereas the orange line undergoes significant drops during major market crashes, such as the Dot-Com Bubble (2000-2002) and the Subprime Mortgage Crisis (2008-2009). This demonstrates that our quant model effectively mitigates market crash risks while achieving higher returns than buy-and-hold investing.

The bottom part of the figure presents key performance measures comparing both strategies:

• standard deviation (lower value indicates reduced volatility and risk).

• maximum drawdown (smaller value indicates less severe portfolio losses).

• Sharpe ratio (higher value indicates a better risk-adjusted return).

Using any of the performance measures, our model-based strategy exhibits less risks. For instance, over 30+ years, our model-based strategy had a worst-year loss of only -10.29%, whereas the buy-and-hold approach saw a worst-year loss of -37.04% and a maximum drawdown of -50.89%—meaning an investor could have seen their portfolio cut in half.

In summary, our quant model is a powerful investment tool that not only enhances risk management by enabling timely avoidance of market downturns but also consistently delivers superior risk-adjusted returns compared to a traditional buy-and-hold strategy. Moreover, it plays a pivotal role in the portfolio management of Hoperation Fund.