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.
[1] Note that drawdown in 2015. That was almost entirely due to the market getting spooked on interest rates to which my strategy is pretty sensitive. I think that that is about to happen again so, blogging like a good analyst prone to survivor-bias-type analysis errors, you probably won't see a chart like this next year after I get totally smoked by Fed and interest rate effects. Like a past post I did, I'm sneaking in a "brag before the fall."
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