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 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.'

Which means for our asset as example:
  • The total return over 5 years of Hedge Strategy is 46.9%, which is smaller, thus worse compared to the benchmark SPY (68.6%) in the same period.
  • Compared with SPY (51%) in the period of the last 3 years, the total return, or performance of 17.6% is lower, thus worse.

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (11%) in the period of the last 5 years, the annual performance (CAGR) of 8% of Hedge Strategy is smaller, thus worse.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 5.6%, which is smaller, thus worse than the value of 14.8% 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.'

Applying this definition to our asset in some examples:
  • The historical 30 days volatility over 5 years of Hedge Strategy is 8.5%, which is lower, thus better compared to the benchmark SPY (13.5%) in the same period.
  • Looking at volatility in of 6.6% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (12.8%).

DownVol:

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. 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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (14.9%) in the period of the last 5 years, the downside volatility of 9.9% of Hedge Strategy is lower, thus better.
  • Looking at downside volatility in of 8.5% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (14.7%).

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:
  • Looking at the risk / return profile (Sharpe) of 0.65 in the last 5 years of Hedge Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.63)
  • During the last 3 years, the risk / return profile (Sharpe) is 0.47, which is lower, thus worse than the value of 0.96 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • The ratio of annual return and downside deviation over 5 years of Hedge Strategy is 0.56, which is lower, thus worse compared to the benchmark SPY (0.57) in the same period.
  • Compared with SPY (0.83) in the period of the last 3 years, the ratio of annual return and downside deviation of 0.36 is lower, thus worse.

Ulcer:

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Applying this definition to our asset in some examples:
  • The Ulcer Ratio over 5 years of Hedge Strategy is 3.02 , which is lower, thus better compared to the benchmark SPY (3.99 ) in the same period.
  • Looking at Ulcer Index in of 2.05 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (4.1 ).

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (-19.3 days) in the period of the last 5 years, the maximum reduction from previous high of -8.6 days of Hedge Strategy is larger, thus better.
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum drop from peak to valley of -7.5 days is higher, thus better.

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) in days.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (187 days) in the period of the last 5 years, the maximum days under water of 239 days of Hedge Strategy is greater, thus worse.
  • Compared with SPY (139 days) in the period of the last 3 years, the maximum days below previous high of 132 days is lower, thus better.

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:
  • The average days below previous high over 5 years of Hedge Strategy is 62 days, which is larger, thus worse compared to the benchmark SPY (42 days) in the same period.
  • During the last 3 years, the average time in days below previous high water mark is 36 days, which is larger, thus worse than the value of 36 days from the benchmark.

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 (%)

  • Note that yearly returns do not equal 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.