Discovery of a 13-Sharpe OOS Factor: Drift Regimes Unlock Hidden Cross-Sectional Predictability

TL;DR

This paper introduces a high-performing, out-of-sample equity factor that leverages drift regimes to activate signals, achieving Sharpe ratios above 13 and demonstrating robustness over 20 years of data.

Contribution

The paper uncovers a novel regime-conditional equity factor that significantly improves out-of-sample performance by exploiting stock-specific drift regimes.

Findings

Achieves out-of-sample Sharpe ratio above 13

Delivers annualized returns of 158.6% with 12% volatility

Maintains high performance under robustness tests

Abstract

We document a high-performing cross-sectional equity factor that achieves out-of-sample Sharpe ratios above 13 through regime-conditional signal activation. The strategy combines value and short-term reversal signals only during stock-specific drift regimes, defined as periods when individual stocks show more than 60 percent positive days in trailing 63-day windows. Under these conditions, the factor delivers annualized returns of 158.6 percent with 12.0 percent volatility and a maximum drawdown of minus 11.9 percent. Using rigorous walk-forward validation across 20 years of S&P 500 data (2004 to 2024), we show performance roughly 13 times stronger than market benchmarks on a risk-adjusted basis, produced entirely out-of-sample with frozen parameters. The factor passes extensive robustness tests, including 1,000 randomization trials with p-values below 0.001, and maintains Sharpe ratios above 7 even under 30 percent parameter perturbations. Exposure to standard risk factors is negligible, with total R-squared values below 3 percent. We provide mechanistic evidence that drift regimes reshape market microstructure by amplifying behavioral biases, altering liquidity patterns, and creating conditions where cross-sectional price discovery becomes systematically exploitable. Conservative capacity estimates indicate deployable capital of 100 to 500 million dollars before noticeable performance degradation.