Backtest: New adaptive Global Market Rotation backtester

I just want to share a screenshot of the new backtest software, we have written in C# to calculate and backtest the new adaptive logical-invest strategies. This software can be used to calculate the variable allocation for the MYRS, GSRS and GMRS. Since 2017, QuantTrader, this backtest software is now also available for retail and institutional investors, see here.

Our backtest software QuantTrader now available

Below you see a 2 year graph showing the Global Market Rotation strategy backtest. The top chart just shows the 6 ETFs used in this strategy. The middle chart shows the allocation in percent of the ETFs for each month and the bottom chart shows the performance chart with EDV and SPY as benchmarks.

It is interesting to see in the backtest, that normal years with strong trends like 2013 have long periods with the same ETFs. 2013 was dominated by MDY and IEV. IEV (Europe) is used as a replacement for FEZ, because it has a 10 year history. In 2014 we had many changes between the markets, but still this type of adaptive algorithm did manage this difficult situation much better than the old algorithm which could only switch 100% into one ETF.

The backtest performance for these last 2 years 19.7% per year, with a Sharpe of 1.94. The old algorithm had 15% annual performance because of a good year 2013 but only a Sharpe ratio of 0.9. In general you can say that during years with long consistent trends, both algorithms will do well, but in years like 2014, where the really best allocation is somewhere in between stocks and Treasuries, a 100% rotation algorithm has problems to find the good ETF.

Best regards
Frank Grossmann

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2017-10-02T20:00:00+00:00By |8 Comments

About the Author:

Frank studied Microtechnics at the Federal Institute of Technology in Lausanne and Business Administration at the Federal Institute of Technology in Zurich. After the Studies in 1989 he founded Labocontrol AG. Labocontrol developed high speed film scanners used in most of the photo labs for the production of Photo CD's. In 2000 Labocontrol was sold to Digital Now and Frank worked as Chief Scientist and later CTO of this Company. In Mai 2002 Frank founded Colour-Science AG a company specialized in image processing algorithms like face detection or red eye removal. Many of these algorithms could be also used to search for pattern in financial data, so Frank began to develop and back test rule based investment strategies. The main focus was to find strategies, which would allow a positive return also during a financial downturn or major financial crash. Based on this research, logical-invest developed some very successful strategies and due to its solid performance and positive returns, we decided to share our knowledge with you and publish it on a monthly basis through "rent-a-strategy".

8 Comments

  1. L. 11/20/2014 at 2:52 pm

    Since you sent the latest signal for Global Market rotation using a split between two funds, I assume that going forward you plan to do the same thing.

    L. R.

  2. Scott Walker 11/20/2014 at 5:16 pm

    L.R.,
    The allocation will adapt in a flexible manner to the market conditions by variable allocations to each position. Research has shown this as superior to abrupt changes and binary allocations, particularly as the market changes regime states whipsaw more quickly.

    Thanks for the comment.
    Scott

  3. Greg Polites 11/21/2014 at 1:29 pm

    Dear Logicalnvest; Great improvements to the presentation and utility of the site and investment strategy. Two observations from the new portfolio strategy you present in this posting. 1) It appears ILF in Aug/Sept was eliminated? If true could you explain how this was accomplished. 2) The Nov pick via email was 50:50 MDY:EDV but the graph appears to indicate 60: 40 EDV:MDY – could you explain. Thank you, Greg

  4. Frank Grossmann 11/22/2014 at 3:25 am

    Hello Greg. Yes, ILF would not have been selected with this method. There are two reasons for this. The first is that now we optimize a Stock-Treasury pair to produce good return at low volatility. The correlation of MDY is much more negative to EDV than ILF. So the resulting volatility is much more smoothed out. With the old system, the correlation between the ETFs was not used for the ranking. The second reason is that we go more for low volatility, so an ETF which goes 8% up in a mont only to dive 13% the next month is considered too dangerous. 8% up is also considered bad volatility because of mean reversion of most ETFs.
    The 60-40 EDV-MDY ratio would have been the ratio for September. The November allocation is written in the box left on the bottom.
    Regards Frank

  5. kiranb 02/26/2016 at 1:53 am

    Is there a direct relation between the optimal allocation (at max Sharpe) and the calculated Sharpe ratios of the 2 ETFs – in other words, can the optimal allocation (e.g. 70-30) be somehow derived/approximated from a formula involving the Sharpe ratios of the 2 ETFs (e.g. allocation is directly proportional to the Sharpe ratios)?

    • Frank Grossmann 02/26/2016 at 12:22 pm

      No, you can not derive it from the single Sharpe values. The combined Sharpe depends much on the correlation of the ETFs. If they are inversely correlated, then the combined Sharpe is higher than both single Sharpe ratios. You can do a manual quick check with ETFReplay in the backtest section.

  6. kiranb 02/26/2016 at 3:27 pm

    Thanks Frank,
    I meant, can the allocation (e.g. 60-40 split) be derived from the individual Sharpes – for example, if SPY/TLT Sharpes are in the ratio 60-40, is the optimal allocation be approximately the same (or some other derived formula).

    Also, have you tried this with intra-day portfolios (e.g. 15 minute bars) and does that yield better risk-adjusted returns – i realize the trading frequency and slippage might get expensive for ETFs, but for Futures or Leveraged ETFs, if there are inherent trends at smaller periods of time, does this give a better return?

  7. Frank Grossmann 02/27/2016 at 7:10 am

    No, the allocation is more a function of the volatility correlation and not single Sharpes. It makes no sense to calculate these values for intraday variations, as you need at least one week to calculate the correlation of two ETFs. Intraday, most of the ETF movements are just noise.

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