Really enjoying your newsletter. But a question: I’ve been reading past posts on your etf strategy. I see the backtest uses 1.6x leverage. How does your strategy perform when unlevered?
Thank you- Very good question. Our strategies are designed to offer the best return/risk characteristics, usually targeting a level of return equal to the level of realised volatility (i.e. an information ratio of 1) + high % positive ratios. Therefore, we tend to be low-vol biased as a starting point for construction and then layer in positions based on conviction on the environment. Leverage is then added to increase volatility to meet return targets.
With volatility comes potential drawdowns, i.e. the higher vol you run the strategy the more chance of a bigger drawdowns. This volatility can be targeted using leverage. So if you’re willing to run a 10% volatility strategy, you’re ballparking a max 10-15% drawdown. Drawdowns are the biggest driving factor in whether someone sticks to a strategy in our experience. Therefore, we offer the best return/reward, and let individuals choose the vol.
For the ETF Strategy is levered 1.6x to match the cumulative returns on S&P 500, to have an apples to apples comparison. (A vol matched basis would be unfair and make our strategy look too good). The unlevered performance is about half the levered performance.
Interesting. Note: The %s on your Alpha Strategy Asset Class Allocation do not add up to 100%.
They are net positioning, i.e. include longs and shorts. Gross positioning at the security level adds to 100%.
Really enjoying your newsletter. But a question: I’ve been reading past posts on your etf strategy. I see the backtest uses 1.6x leverage. How does your strategy perform when unlevered?
Thank you- Very good question. Our strategies are designed to offer the best return/risk characteristics, usually targeting a level of return equal to the level of realised volatility (i.e. an information ratio of 1) + high % positive ratios. Therefore, we tend to be low-vol biased as a starting point for construction and then layer in positions based on conviction on the environment. Leverage is then added to increase volatility to meet return targets.
With volatility comes potential drawdowns, i.e. the higher vol you run the strategy the more chance of a bigger drawdowns. This volatility can be targeted using leverage. So if you’re willing to run a 10% volatility strategy, you’re ballparking a max 10-15% drawdown. Drawdowns are the biggest driving factor in whether someone sticks to a strategy in our experience. Therefore, we offer the best return/reward, and let individuals choose the vol.
For the ETF Strategy is levered 1.6x to match the cumulative returns on S&P 500, to have an apples to apples comparison. (A vol matched basis would be unfair and make our strategy look too good). The unlevered performance is about half the levered performance.
Thanks for taking the time to respond at length. Your work is excellent. Take care and keep the content coming!