Lumos Alpha Portfolios: Q3 2025 Review and Outlook

The third quarter of 2025 has concluded. Below is a performance summary for the three portfolios managed by Lumos Alpha:

Quant Portfolio I:

Q3 2025 Return: 16.0% | Year-to-Date (YTD) 2025 Return: 33.8%

Quant Portfolio II:

Q3 2025 Return: 23.8% | YTD 2025 Return: 50.6%

Flagship Portfolio:

Q3 2025 Return: 7.3% | YTD 2025 Return: 15.7%

All returns are based on cash accounts. Clients utilizing margin accounts have achieved higher returns. For comparison, the S&P 500 ETF returned 8.1% in Q3 and 14.7% YTD.

Quant Portfolio I

This portfolio is designed for retirement accounts (e.g., IRA, Roth, 401(k)) and taxable investment accounts for middle-income families.

The portfolio is driven by a proprietary AI algorithm that identifies short-term trading opportunities in high-volatility stocks or ETFs. Over the past five years (2020-2024), the portfolio achieved a compound annual growth rate (CAGR) of 40.3%. In Q3 2025, the strategy executed 3-4 primary trades, generating a return of 16.0%, contributing to a YTD return of 33.8%. For clients using margin accounts, an auxiliary algorithm leverages 20-30% of marginal capital for additional trading, further enhancing potential returns.

Clients adopting this portfolio strategy should be prepared to tolerate potential drawdowns of approximately 15% and understand that the algorithm does not guarantee positive returns every month. For instance, the portfolio experienced negative returns for two consecutive months in the first quarter of this year.

Although the core AI algorithm focuses on short-term trades, its trading frequency remains moderate. It is also currently a long-only strategy. Lumos Alpha is in the final validation stage of developing several new AI algorithms designed to identify more frequent trading opportunities, including both long and short positions. These auxiliary algorithms are expected to be integrated into the portfolio strategy in Q4 2025, with the goal of increasing the frequency of profitable months while reducing drawdowns.

Quant Portfolio II

This portfolio employs an AI algorithm similar to Quant Portfolio I, but trades a different stock universe focused on even higher-volatility stocks or ETFs. Consequently, this portfolio exhibits greater volatility. Over the past five years (2020-2024), it achieved a CAGR of 60.1%. In Q3 2025, it returned 23.8%, bringing its YTD return to 50.6%.

Flagship Portfolio

This portfolio is tailored for high-income households, combining a long-term investment philosophy with disciplined risk control and a specific loss-harvesting strategy. This integrated approach aims to deliver substantial capital appreciation while significantly minimizing capital gains taxes. (For a detailed overview, please see: Flagship Portfolio).

As of September, the portfolio was allocated with 80% in long-term equity holdings and 20% in Quant Portfolio I. It delivered a return of 7.3% in Q3 and 15.7% YTD. Notably, the portfolio had not incurred any capital gains taxes as of the end of September.

During the quarter, the majority of long-term holdings remained unchanged. The primary activity involved divesting a single Chinese FinTech position and reallocating the proceeds into $ASML and $PLTR. Both new acquisitions gained over 30% during the quarter.

We initiated the position in $ASML due to a market misjudgment that led to a significant valuation discount; our valuation models indicated it was approximately 25% below its intrinsic value at the time of purchase.

The investment in $PLTR was based on our growth stock model, which identified its price as attractive relative to its fundamentals. We were further convinced by its strong and unique competitive moat in defense and AI, and we view the ongoing and escalating conflicts in Europe and the Middle East, along with U.S. involvement, as a sustained macro-tailwind for the company.

Q4 2025 Outlook

As previously mentioned, we are developing new auxiliary trading algorithms for Quant Portfolios I and II. These algorithms are designed for a moderately higher trading frequency and will incorporate both long and short capabilities, aiming to enhance returns while reducing drawdowns.

Given our assessment that the market is in the late stage of a bull cycle, we cannot rule out the potential for a systemic market shock akin to those experienced in 2000 or 2008. In such an environment, the agility of Quant Portfolios I and II should prove advantageous in helping clients navigate major risks and protect accumulated gains. For new clients onboarding with Lumos Alpha, Quant Portfolio I will be the default strategy (though clients may clearly request Quant Portfolio II).

Clients of the Lumos Alpha Flagship Portfolio are typically high-net-worth, high-income individuals, often facing personal income tax rates above 40%. A full and immediate conversion of the portfolio to Quant Portfolio I or II is not optimal from a tax-efficiency standpoint. Therefore, we plan to implement a gradual reallocation. In Q4, we expect to reduce the long-term equity allocation within the Flagship Portfolio to approximately 65-70%, while allocating 30-35% to Quant Portfolio I. This 30-35% allocation is intended to provide more dynamic hedging and protection in the event of significant market volatility.