Description of Hedge Strategy

This sub-strategy looks at two components and chooses the most appropriate one: A Treasury and a GLD-USD sub-strategy. The addition of gold provides an option for prolonged inflationary environments that could place bonds in a multi-year bear market.

The equity/bond (or in our case HEDGE) pair is interesting because most of the time these two asset classes profit from an inverse correlation. If there is a real stock market correction, money typically flows towards treasuries and gold rewarding holders and providing crash protection. 

Statistics of Hedge Strategy (YTD)

What do these metrics mean? Show Details

TotalReturn:

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Using this definition on our asset we see for example:
  • Looking at the total return of 60% in the last 5 years of Hedge Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (68%)
  • Compared with SPY (53.9%) in the period of the last 3 years, the total return, or increase in value of 26.8% is lower, thus worse.

CAGR:

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (10.9%) in the period of the last 5 years, the annual performance (CAGR) of 9.9% of Hedge Strategy is smaller, thus worse.
  • Compared with SPY (15.5%) in the period of the last 3 years, the annual return (CAGR) of 8.2% is smaller, thus worse.

Volatility:

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Which means for our asset as example:
  • Looking at the historical 30 days volatility of 8.5% in the last 5 years of Hedge Strategy, we see it is relatively smaller, thus better in comparison to the benchmark SPY (13.2%)
  • Compared with SPY (12.6%) in the period of the last 3 years, the historical 30 days volatility of 8.5% is smaller, thus better.

DownVol:

'Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (14.6%) in the period of the last 5 years, the downside risk of 9% of Hedge Strategy is lower, thus better.
  • Compared with SPY (14.2%) in the period of the last 3 years, the downside deviation of 8.9% is lower, thus better.

Sharpe:

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Which means for our asset as example:
  • Compared with the benchmark SPY (0.64) in the period of the last 5 years, the Sharpe Ratio of 0.87 of Hedge Strategy is higher, thus better.
  • Compared with SPY (1.03) in the period of the last 3 years, the Sharpe Ratio of 0.68 is lower, thus worse.

Sortino:

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Which means for our asset as example:
  • Compared with the benchmark SPY (0.58) in the period of the last 5 years, the ratio of annual return and downside deviation of 0.82 of Hedge Strategy is greater, thus better.
  • Looking at ratio of annual return and downside deviation in of 0.64 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.91).

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (3.93 ) in the period of the last 5 years, the Downside risk index of 3.52 of Hedge Strategy is lower, thus worse.
  • During the last 3 years, the Ulcer Ratio is 2.47 , which is smaller, thus worse than the value of 3.95 from the benchmark.

MaxDD:

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Using this definition on our asset we see for example:
  • Looking at the maximum reduction from previous high of -10.9 days in the last 5 years of Hedge Strategy, we see it is relatively larger, thus better in comparison to the benchmark SPY (-19.3 days)
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum DrawDown of -6.6 days is greater, thus better.

MaxDuration:

'The Maximum Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Applying this definition to our asset in some examples:
  • The maximum days below previous high over 5 years of Hedge Strategy is 223 days, which is greater, thus worse compared to the benchmark SPY (187 days) in the same period.
  • Compared with SPY (131 days) in the period of the last 3 years, the maximum days below previous high of 138 days is larger, thus worse.

AveDuration:

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Applying this definition to our asset in some examples:
  • Looking at the average days under water of 51 days in the last 5 years of Hedge Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (37 days)
  • Compared with SPY (30 days) in the period of the last 3 years, the average days below previous high of 44 days is higher, thus worse.

Performance of Hedge Strategy (YTD)

Allocations of Hedge Strategy
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Allocations

Returns of Hedge Strategy (%)

Annual returns of Hedge Strategy do not equal the sum of monthly returns due to compounding.
Performance results of Hedge Strategy are hypothetical, do not account for slippage, execution cost and taxes, and based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.