Mac Bank quants pick Melbourne Cup winners

For fun only:

 

The first Tuesday in November has arrived and the Macquarie Quant team have focussed their factor model on Flemington, transforming racing stats into traditional Quant signals to rank the runners in the race.

 Horses at the top of the model include Lucia Valentina, Signoff, Fawkner, Mutual Regard, Admire Rakti and Protectionist.

 Each year we look to the market to guide us and make slight tweaks to our model. The Australian economy continues to face the prospect of low growth as we transition from mining led growth to broader based, consumer and nonmining led growth. The market is clearly being divided into winners and losers and investors have been seeking growth exposure via offshore earners.

 International horses continue to dominate the Cup field with over 70% of runners coming from outside AU/NZ. (see chart on left) We place a tilt to proven international horses but still favour those who have Australian form (Quality, reliable horses).

 The Halloween announcement by the Bank of Japan to bolster quantitative easing also raised eyebrows here. A sharp drop in the yen gives a nice boost to AUD denominated prize money should Japanese owned, Admire Rakti repeat his performance in the Caulfield Cup. Do the Japanese owners have some influence here?

Strategy
 We adjust our strategy slightly this year to allow for the Japanese funny business. We firstly put an each way bet on Admire Rakti.

 We then revert to our traditional strategy. Placing a bet on the top horse in our model and going for the trifecta using the top quartile of horses. This best mirrors the way we (quants) approach equity investing. The best way to implement the trifecta strategy is via a ‘box trifecta’ on the top 6 horses in the model (see your local bookie for a description of this bet). Factors used in the model

• Quant Signal Factor Quant Signal Quant Signal
• Sentiment Odds Quality Odds Dispersion
• Momentum Odds movement Win %
• Form Innovative Data / Other Age, Barrier
• Value Avg prize money per race Australian Form
• International Horse

 We show the payoff to our historic strategy since 2007 inside. After a couple of years with no lollies we gained some redemption this year successfully picking the winner of the World Cup. However the poor results in recent Melbourne Cups are a timely reminder that this is still simply gambling!

 This model is not intended to be taken seriously. The Quant team has limited knowledge of horse racing and the purpose of this article is primarily fun.