PMAISep 14, 2025

RegimeFolio: A Regime Aware ML System for Sectoral Portfolio Optimization in Dynamic Markets

arXiv:2510.14986v18 citationsh-index: 7IEEE Access
Originality Incremental advance
AI Analysis

This addresses the challenge of adapting portfolio optimization to dynamic market conditions for financial investors, representing a domain-specific incremental improvement.

The paper tackled the problem of portfolio optimization in non-stationary financial markets by proposing RegimeFolio, a regime-aware framework that integrates volatility regime segmentation with sector-specific forecasting and adaptive allocation, achieving a cumulative return of 137% and a Sharpe ratio of 1.17.

Financial markets are inherently non-stationary, with shifting volatility regimes that alter asset co-movements and return distributions. Standard portfolio optimization methods, typically built on stationarity or regime-agnostic assumptions, struggle to adapt to such changes. To address these challenges, we propose RegimeFolio, a novel regime-aware and sector-specialized framework that, unlike existing regime-agnostic models such as DeepVol and DRL optimizers, integrates explicit volatility regime segmentation with sector-specific ensemble forecasting and adaptive mean-variance allocation. This modular architecture ensures forecasts and portfolio decisions remain aligned with current market conditions, enhancing robustness and interpretability in dynamic markets. RegimeFolio combines three components: (i) an interpretable VIX-based classifier for market regime detection; (ii) regime and sector-specific ensemble learners (Random Forest, Gradient Boosting) to capture conditional return structures; and (iii) a dynamic mean-variance optimizer with shrinkage-regularized covariance estimates for regime-aware allocation. We evaluate RegimeFolio on 34 large cap U.S. equities from 2020 to 2024. The framework achieves a cumulative return of 137 percent, a Sharpe ratio of 1.17, a 12 percent lower maximum drawdown, and a 15 to 20 percent improvement in forecast accuracy compared to conventional and advanced machine learning benchmarks. These results show that explicitly modeling volatility regimes in predictive learning and portfolio allocation enhances robustness and leads to more dependable decision-making in real markets.

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