Navigating the Alpha Jungle: An LLM-Powered MCTS Framework for Formulaic Factor Mining

TL;DR

This paper presents a novel LLM-powered MCTS framework for formulaic alpha mining in quantitative finance, improving search efficiency, interpretability, and predictive performance over existing methods.

Contribution

It introduces a unique integration of LLMs with MCTS guided by financial backtesting feedback, enhancing search diversity and formula interpretability.

Findings

Outperforms existing methods in predictive accuracy.

Generates more interpretable alpha formulas.

Achieves better trading performance on real data.

Abstract

Alpha factor mining is pivotal in quantitative investment for identifying predictive signals from complex financial data. While traditional formulaic alpha mining relies on human expertise, contemporary automated methods, such as those based on genetic programming or reinforcement learning, often struggle with search inefficiency or yield alpha factors that are difficult to interpret. This paper introduces a novel framework that integrates Large Language Models (LLMs) with Monte Carlo Tree Search (MCTS) to overcome these limitations. Our framework leverages the LLM's instruction-following and reasoning capability to iteratively generate and refine symbolic alpha formulas within an MCTS-driven exploration. A key innovation is the guidance of MCTS exploration by rich, quantitative feedback from financial backtesting of each candidate factor, enabling efficient navigation of the vast search space. Furthermore, a frequent subtree avoidance mechanism is introduced to enhance search diversity and prevent formulaic homogenization, further improving performance. Experimental results on real-world stock market data demonstrate that our LLM-based framework outperforms existing methods by mining alphas with superior predictive accuracy and trading performance. The resulting formulas are also more amenable to human interpretation, establishing a more effective and efficient paradigm for formulaic alpha mining.