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? [Read More] [Hide]

TotalReturn:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Using this definition on our asset we see for example:
  • The total return, or performance over 5 years of Hedge Strategy is 60.6%, which is smaller, thus worse compared to the benchmark SPY (68.7%) in the same period.
  • Looking at total return, or performance in of 19.6% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (47.9%).

CAGR:

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Applying this definition to our asset in some examples:
  • Looking at the compounded annual growth rate (CAGR) of 9.9% in the last 5 years of Hedge Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (11%)
  • During the last 3 years, the compounded annual growth rate (CAGR) is 6.2%, which is lower, thus worse than the value of 14% from the benchmark.

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 volatility of 8.3% in the last 5 years of Hedge Strategy, we see it is relatively smaller, thus better in comparison to the benchmark SPY (13.3%)
  • Looking at volatility in of 6.6% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (12.5%).

DownVol:

'The downside volatility is similar to the volatility, or standard deviation, but only takes losing/negative periods into account.'

Which means for our asset as example:
  • Compared with the benchmark SPY (14.6%) in the period of the last 5 years, the downside volatility of 9.2% of Hedge Strategy is smaller, thus better.
  • Compared with SPY (14.2%) in the period of the last 3 years, the downside risk of 7.7% is smaller, thus better.

Sharpe:

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Using this definition on our asset we see for example:
  • Looking at the Sharpe Ratio of 0.9 in the last 5 years of Hedge Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (0.64)
  • Compared with SPY (0.91) in the period of the last 3 years, the ratio of return and volatility (Sharpe) of 0.56 is smaller, thus worse.

Sortino:

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Which means for our asset as example:
  • The excess return divided by the downside deviation over 5 years of Hedge Strategy is 0.81, which is larger, thus better compared to the benchmark SPY (0.58) in the same period.
  • During the last 3 years, the ratio of annual return and downside deviation is 0.48, which is lower, thus worse than the value of 0.81 from the benchmark.

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:
  • The Ulcer Index over 5 years of Hedge Strategy is 2.9 , which is smaller, thus worse compared to the benchmark SPY (3.96 ) in the same period.
  • Compared with SPY (4.01 ) in the period of the last 3 years, the Ulcer Ratio of 2.21 is lower, thus worse.

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.'

Which means for our asset as example:
  • Looking at the maximum drop from peak to valley of -8.6 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)
  • During the last 3 years, the maximum reduction from previous high is -4.4 days, which is higher, thus better than the value of -19.3 days from the benchmark.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Which means for our asset as example:
  • Looking at the maximum days below previous high of 239 days in the last 5 years of Hedge Strategy, we see it is relatively greater, thus worse in comparison to the benchmark SPY (187 days)
  • During the last 3 years, the maximum days below previous high is 173 days, which is larger, thus worse than the value of 139 days from the benchmark.

AveDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. 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.'

Using this definition on our asset we see for example:
  • Looking at the average time in days below previous high water mark of 57 days in the last 5 years of Hedge Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (41 days)
  • Looking at average time in days below previous high water mark in of 46 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (36 days).

Performance of Hedge Strategy (YTD)

Historical returns have been extended using synthetic data.

Allocations of Hedge Strategy
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Allocations

Returns of Hedge Strategy (%)

  • "Year" returns in the table above are not equal to the sum of monthly returns due to compounding.
  • Performance results of Hedge Strategy are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.