Home-Rolled Systematic Alt vs. What Benchmarks?

Since my trading strategy tends to lean heavily on momentum and trend following I generally don't use the S&P500 as a benchmark since that would imply a comparison to a strategy that is 100% allocated to Large Cap US equities...which I do not do in my strategy or elsewhere. That's a comparison, though, that is always out there in the media but I happen to find it to be meaningless most of the time. When I am being honest with myself I compare my "active" self to either a mean-variance map of various multi-asset-class allocations (that's in a past post I did. It would represent a comparison to a whole bunch of asset allocations that I could do passively if I were not trying to be active) or I can compare myself to various benchmarks more closely related to what I actually am trying to do specifically. For example, for benchmark evaluations, I can compare the strategy to a particular asset allocation benchmark (e.g., S&P Target Risk Moderate Index which is something like 50-50 or 40-60 equity bond allocation -- think iShares AOM even with its imperfections) so that I can compare myself to a realistic representation of what I might have done in a passive portfolio that is more or less similar what I do elsewhere as a normal asset-allocating retiree investor.  That, by the way, is a classic comparison of "do something" (me) to a "do nothing" (target risk index) baseline which is a fair comparison and I do make that evaluation often. It sort of answers the question "am I adding any value by being active."  An alternative (no pun intended), since I do a lot of trend following, is to compare myself to the professionals running managed futures private placements or managed-futures-based mutual funds.  In this case the comparison strategies supposedly follow a rule-based and trend following template vaguely similar to what I do. That means that I think it's a fair comparison of head-to-head trading skill...or at least that's the conceit.  I make the weird assumption, though, based on very little, that these guys know what they are doing and that I, for the most, part don't. That's debatable either way, I guess.  In any case, a bad relative performance by me when compared to the MF benchmarks, net of fees, would probably lead me to drop my self-managed active strategy and then either outsource to others (if that approach were to still be accretive to my efficiency...a different analysis altogether) or retreat to an entirely passive allocation.  In other words this benchmark thing is a decision tool, and an important one at that.  This, for what it's worth, is a time series of my strategy vs. a few managed futures funds (my benchmarks):

That's me in the green.  The other three lines are two private placements in managed futures and one managed futures mutual fund.  The time frame is 2012-2016 (untested by a downturn, fwiw). I blocked the names out because I don't remember if I signed something in the placements preventing me from showing their results.  The purple line is a private placement that is relatively well known and that I have some respect for.  The red line I dropped this year because, well because look at it.  The blue line is an off-the-shelf and well known managed futures mutual fund from a large provider of systematic alternative-risk funds.  I like those guys too but I'm still paying them 120 bp which I guess isn't all that crazy all things considered. Better than 2 and 20 is the best I can say.

Conclusion?

Given what I do, it's probably a good and fair comparison to use managed futures funds as a benchmark which I will continue to do in addition to using an asset-allocation-based index for a baseline. Fwiw, I think the purple line has a lot of potential to either sink me or sail past my strategy so we'll see over time whether I can keep up.  For now, I guess I'll conclude that I'm still in the game, if not ahead[1], when looking at it like this and I'm kinda gratified that I can hold my own (and not pay 2 and 20!) over more than 4 1/2 years against guys that get paid way, way more than zero.  Me? I get paid zero.  

Weekend Links

QUOTE OF THE DAY

“We didn’t give ourselves the participation trophies, just saying!”  -A millennial 

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

The 3 Stages of Retirement Income, Darrow Kirkpatrick.  Based on my experience living in retirement, I’m seeing three irreversible stages of retirement income. Once you leave each one behind, you’ll be fully dependent on only what’s left….  

Floor And Ceiling Retirement Spending, With A Twist, W Pfau.   

The Implied Longevity Curve: How Long Does the Market ThinkYou Are Going to Live? Milevskey et. al. Journal of Investment Consulting Vol 17 2016.  In other words, over the past decade markets implied an improvement in longevity of between six and seven weeks per year for males and between one and three weeks for females. Although these values are implied from quotes, they are consistent with forward-looking demographic projections… This research is relevant to practitioners interested in the optimal timing and allocation to life annuities as our results indicate that annuitization procrastinators are swimming against an uncertain but rather strong longevity trend.  

One More Update on an Amateur Alt Risk System

I realize that this is a little repetitive with some past posts I've done but I wanted to throw this out there again because I think that the Fed and interest rates changes are going to kill me later this year and I just wanted to again claim a brief moment in the sun before that happens.  This chart is my core strategy put up on a mean variance map against portfolios of random combinations of either 2 or 5 different asset class ETFs: Bonds, US Large Cap, International developed, Real Estate, and Gold. That is my imperfect representation of stuff that could be plausibly stitched together into a retail allocation.  That and the data is easy to get. I know that posting this chart (especially given the short amount of time covered) can be a type of soft boasting which, if the literary canon of the last 3000 years (and market experience over the last 100) means anything, means that I will likely get my face rubbed in that boast sometime soon but here it is anyway.  

     as of 10/26/2016    2014-Oct2016. 

The strategy itself is more or less this: fixed income momentum using mostly etfs + macro exposure (mostly forex, interest rates and commodities) + short volatility (mostly short futures options) + other (a messy collection of stuff I perhaps shouldn't be doing).  All of this sits on top of what I can only call an assertive, if not dangerous, interpretation of a collateral-yield program.  

Another reason for putting this kind of thing out here again without the details is to convince myself, if not others, that a retail/amateur investor can in fact create an edge in the capital markets and deploy his or her own capital in an efficient manner without high minimums, long lockups or out-flow-gates, and onerous and unpleasant and often unearned fees…at least for a short time. I mean really, look at hedge fund results this year.  90% of these guys are overpriced under-performing bozos (keep in mind I have awestruck respect for the ones that are at the very top of the industry but they are few and far between and not accessible to me). I realize that the kind of active investing/trading implied in the above is not everyone's cup of tea and requires a little bit of time and effort but it is at least doable.  For me, this is not a full time job...at this point, anyway. 

Yield Curve Range Since 2011

from here

Watch the World Get Better

Press play on the embedded image and watch the world get better for a change.

Fail Rate Estimates vs. Number of Simulation Runs

The Votes Are In

My reader poll is done.  The question was whether I should keep doing this or move on.  Ignore the fact that I've found this "what I've been reading lately" linkfest to be totally ruinous to my eyes, the weight of the poll is upon me especially since I got a 100% "keep going" vote.  We'll also ignore that it was one vote. I think the mandate is clear.

Weekend Links

QUOTE OF THE WEEK

If you drove drunk but got home unscathed, you wouldn’t wake up the next morning and think, “I guess it’s okay to get behind the wheel after 13 beers.” Yet, when handling our finances, we do that all the time.  Jonathan Clements

CHART OF THE WEEK

RETIREMENT FINANCE AND PLANNING

Reverse Mortgages: When the Last Resort is the Best Resort, Dirk Cotton.  If you expect to remain in your home throughout retirement, my advice is to consider opening a HECM line of credit today, while interest rates are low and the maximum HECM loan value is high, but to hold off on spending much of it until you see what life has in store. Often when spending home equity, the last resort will prove the best. 

How Variable Withdrawals Improve Retirement Outcomes, Joe Tomlinson.  Once a retiree secures funding for essential spending needs, the remaining assets are “liberated” and can be invested more aggressively. [comment: I can't recall a single article by Joe that I have not found useful and insightful] 

I'm Not Immune to the Charms of a Possible Silver Trade

I was looking at silver futures today and I'm thinking it's possible there are some opportunities on the short side of future's options.  My point of view on fundamentals is that I don't think it's going to run a lot either way...but I can't support that here in a post very well since I don't have a lot of research at my finger tips.  Technically, the signals aren't stacking up strongly either way as far as I can tell so selling premium might not hurt.  The premiums seem to be ok -- not perfect, just ok -- and far enough out in a lower risk zone that it might be worth a look.  I'll be keeping an eye on this over the next week and doing a little research to see what I can gin up.  So far, as of today, this is what it looks like to me, with strike prices on the x axes.  Getting 2-300 for deltas under 10 for a couple months of time decay isn't too bad but I might be wrong. No doubt I'm missing something so I'll take my time.

A Dirty Little Piece of Braggadocio

I run, as a sideline, a hobby perhaps, though with a just-slightly-less-than-trivial grubstake, a systematic alt risk strategy that is more or less this: (fixed income momentum)+(macro)+(short vol)+(other).  Let's call it an incoherent hodgepodge of non-correlation strategies I thought I could manage based on all sorts of things I've picked up here and there over the years working in areas like consulting, trading, hedge funds, etc.  I have posted a bit on this elsewhere.  Mostly, if not entirely, rule based, I've been running this thing from somewhere around Q2 2011 [red flag: I am not tested by '07-'09!] thru today with minor twists and turns in strategy here and there over the years.  I have to say that during most days, weeks, months and years over that entire slice of time I have had serious and entrenched and ongoing doubts about whether what I am doing is accretive, on the margin, to my family's financial world, a financial world where the mistakes could be fatal to me and my kids if I get it wrong (that means I test everything, all the time, to make sure).  That also means that I have had a total commitment, every step of the way, to the proposition that the absolute millisecond I am convinced that it, this thing I do, is not adding to my overall efficiency, I will walk away...with no regrets...ever.    On the other hand, for a brief shining moment, I think I can say that I am doing ok. Tomorrow is another story but today is ok.  This is what I see YTD 2016:


+04.70%   S&P total returns
+04.29%   Barclays Hedge Fund Index
+00.15%   Barclays CTA index
- 01.56%   Credit Suisse Hedge Fund index
- 01.08%   Credit Suisse Global Macro index
- 03.24%   AQR Managed Futures returns
+04.30%   AOM asset allocation ETF*

+08.90%  RiversHedge "junk" strategy


Ah, but what about volatility you say?  I have no idea right now but every time I've checked on this over the last 5 years, the RiversHedge "junk" strategy has had substantially lower vol than all of that other stuff. Every time I put this on a mean variance map I seem to do ok (there are posts on the site that have the goods on this). I was too lazy to look at this issue for this particular post but I am confident that my Sharpe Ratio is on pretty solid ground here.  This is not a public accounting kinda thing so I guess you'll have to trust me for now.  Like I said in the title, I'm just doing a dirty little bit of bragging before everything goes south.  You know, a pride-and-fall kind of thing.





* Last time I checked this was 40-60 to 50-50 stocks/bonds.  Depends on when one looks.  I also need to dbl chk returns of AOM and S&P since the allocation index returns are a little too close to the S&P.  That confuses me but I will retreat to the hedge I've used before: no one reads this stuff so the stakes are low...

Weekend Links

QOTD

It’s hard to know the difference between “Be patient” and “Change your mind when the facts change.”  Morgan Housel

CHART OF THE DAY

      Withdrawal rates in retirement vs retirement duration in terms of fail rate estimates. 

       If I remember correctly this was from retirementresearcher.com.

      

RETIREMENT FINANCE AND PLANNING

Seeking A Fixed Percentage Approach To Retirement Spending, Pfau. 

Pension Section News – Sep. 2016, Society of Actuaries. Selected Articles:

• Thinking About Spending in Retirement: Findings From SOA and EBRI Research By Anna M. Rappaport
• Decumulation Strategy for Retirees: Which Assets to Liquidate  By Charles S. Yanikoski
• Decumulation for a New Generation  By Elizabeth Bauer
• Multiple Objective Asset Allocation for Retirees Using Simulation By Kailan Shang and Lingyan Jiang
• Decisions Misaligned With Priorities: The Non- Annuitization of Retirement Savings By Paul J. Yakoboski

Trading Time for Money

I keep bumping up against various option selling pros both online and in books that are pretty convincing about the idea of "trading time for money" -- by which they mean: get away from the common wisdom of option sellers that are focused on less-than-30-day time decay range "standard" -- in order to collect more premium for less risk. This is taking liberties with paraphrasing, of course, but their main case, which I think in general is more correct than not, is that by going further out in tenure (2-6 months tenure rather than 30 days or less) there is a sweet spot in time decay that provides some benefits like:

Another Case for Selling Options

This post is a pass thru post but I thought, since I often write options, that EconomPic.com had some good points on short-option strategies in an expensive market that were worth pulling out of the usual linkfest I do on Fridays.

     The Case for Put Writing in an Expensive Market

Hurricane in my hood