New strategies:
#240 – Sector Rotation via Credit Relative Value
Period of rebalancing: Weekly
Markets traded: equities
Instruments used for trading: ETFs, stocks, funds
Complexity: Complex strategy
Bactest period: 1999 – 2012
Indicative performance: 12.40%
Estimated volatility: 17.20%
Source paper:
Cooper: Easy Volatility Investing
http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf
Abstract:
For many decades the only way to invest in volatility has been through trading options, futures, or variance swaps. But in recent years a number of volatility-related exchange traded Funds (ETFs) and Exchange Traded Notes (ETNs) have been launched which make volatility trading accessible to theretail investor and fund managers without the need to access futures markets. Our objective is to devise a trading strategy using them. We document where volatility returns come from, clearing up some misconception in the process. Then we illustrate five different strategies that will a ppeal to different investors. Four of the strategies are simple to describe and implement. All of the strate gies have had extraordinary returns with high Sharpe Ratios and low correlation to the S&P500, in some cases negative correlation. The returns seems to be too good to be true – like picking up $100 bills in front of a steamroller – so we have a detailed discussion on the risks and the nature of the steam roller. We illustrate how these strategies can be incorporated into existing portfolios to reduce portfolio risk especially in times of crisis. They have positive exposure to the markets during good times and negative exposure during bad times. Unfortunately they do not always provide absolute returns and while reducing net portfolio drawdowns they can themselves have significant drawdowns. Still, we suggest that a traditional 60% equities, 40% bonds portfolio should be adjusted to 55% equities, 35% bonds, and 10% volatility. This is primarily an expository paper which explains concepts that are quite simple. So we omit formal technicalities such as bootstrap, robustness, statistical, and stress tests and leave out mathematics apart from some interesting notes that we confine to an optional technical appendix. The investing strategies are very easy to apply and the (optional reading) discussions of the mechanics of the futures markets belies their simplicity.
#241 – Trading VIX ETFs
Period of rebalancing: Daily
Markets traded: equities
Instruments used for trading: ETFs
Complexity: Simple strategy
Bactest period: 2004 – 2013
Indicative performance: 84.60%
Estimated volatility: 51.20%
Source paper:
Cooper: Easy Volatility Investing
http://www.naaim.org/wp-content/uploads/2013/00R_Easy%20Volatility%20Investing%20+%20Abstract%20-%20Tony%20Cooper.pdf
Abstract:
For many decades the only way to invest in volatility has been through trading options, futures, or variance swaps. But in recent years a number of volatility-related exchange traded Funds (ETFs) and Exchange Traded Notes (ETNs) have been launched which make volatility trading accessible to theretail investor and fund managers without the need to access futures markets. Our objective is to devise a trading strategy using them. We document where volatility returns come from, clearing up some misconception in the process. Then we illustrate five different strategies that will a ppeal to different investors. Four of the strategies are simple to describe and implement. All of the strate gies have had extraordinary returns with high Sharpe Ratios and low correlation to the S&P500, in some cases negative correlation. The returns seems to be too good to be true – like picking up $100 bills in front of a steamroller – so we have a detailed discussion on the risks and the nature of the steam roller. We illustrate how these strategies can be incorporated into existing portfolios to reduce portfolio risk especially in times of crisis. They have positive exposure to the markets during good times and negative exposure during bad times. Unfortunately they do not always provide absolute returns and while reducing net portfolio drawdowns they can themselves have significant drawdowns. Still, we suggest that a traditional 60% equities, 40% bonds portfolio should be adjusted to 55% equities, 35% bonds, and 10% volatility. This is primarily an expository paper which explains concepts that are quite simple. So we omit formal technicalities such as bootstrap, robustness, statistical, and stress tests and leave out mathematics apart from some interesting notes that we confine to an optional technical appendix. The investing strategies are very easy to apply and the (optional reading) discussions of the mechanics of the futures markets belies their simplicity.
New research papers related to existing strategies:
#1 – Asset Class Trend Following
Guilleminot, Ohana, Ohana: Risk vs Trend Driven Global Tactical Asset Allocation
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2253335
Abstract:
The 2008 financial crisis has severely challenged passive forms of investment. In this paper, we compare two systematic investment processes that a global asset allocator may employ to preserve its capital in the face of a turbulent financial environment. The "risk-driven" allocation, derived from the popular "risk-parity" approach, has garnered a strong interest from both scholars and practitioners in the recent years. It aims at enforcing a constant risk target and maintaining a balanced risk profile over time. This paper introduces a novel "trend-driven" approach, which enhances the risk-driven strategy by cutting the exposure to downward drifting assets. We then compare the risk-adjusted performances of risk and trend driven approaches on different investment universes (composed of equity, commodity, currency and bond futures contracts) over the 1993-2012 period. We find that a trend-driven approach yields increased Sharpe ratios and lower drawdowns in average relative to a risk-driven strategy. However, the outperformance of the trend-driven process is not stable over time: periods with exploitable trends alternate with long-lasting trendless periods. Overall, the key advantage of the trending strategy over the risk-driven one is its higher smoothness. This is due to a better resilience to 2008-like financial meltdowns, which are well-predicted by trending signals and undermine the diversification objective pursued by the risk-parity approach. These results demonstrate the value of coupling risk and trajectorial signals in tactical asset allocation.
#11 – Stock Return Reversal within Industries
#13 – Short Term Reversal in Stocks
Nagel: Evaporating Liquidity
http://faculty-gsb.stanford.edu/nagel/pdfs/LiqSupply.pdf
Abstract:
The returns of short-term reversal strategies in equity markets can be interpreted as a proxy for the returns from liquidity provision. Using this a pproach, this article shows that the return from liquidity provision is highly predictable with the VIX index. Expected returns and conditional Sharpe ratios from liquidity provision spike during periods of financial market turmoil. The results point to withdrawal of liquidity supply, and an associated increase in the expected returns from liquidity provision, as a main driver behind the evaporation of liquidity during times of financial market turmoil, consistent with theories of liquidity provision by financially constrained intermediaries.
