- 10/27/2014 at 12:43 am #12112Alexander HornKeymaster
Support and discussion thread for the strategy.12/13/2014 at 2:15 am #14698xmonikaParticipant
Does the new balanced strategy have the algorithm to get out of the EDV and ZIV in case that high valued bonds and index will go south simultaneously? How it will behave in that case?12/13/2014 at 8:16 am #14702
Yes, the new algorithm is calculating the composition which gave the best return to risk ratio (Sharpe ratio) for the lookback period. If no positive Sharpe ratio is found because both assets go down, then the algorithm will slowly reduce the total allocation from 100% invested up to 0% (= 100% cash). The strategy will also go partially to cash when volatility is too high.12/16/2014 at 2:28 pm #15017xmonikaParticipant
Thank you for the previous reply, Frank. Can you guys please check Investment & Return tables of this strategy with focus on what type of price is used for opening the trades?
It seems to me the table is using Close prices of previous day i.e.
2014 28-Nov-2014 15-Dec-2014 20%ZIV+80%EDV 1.8563% 588% 23.08% -3.71% 171% 9.52%
means that the 1.8563% performance is valid for 15.12. Close – 28.11. Close but the subscribers had received the alerts on 30.11. and 16.12. respectively. So they can only trade next bar at open at earliest. This time the return would be 3.109%. So what I am missing then?12/18/2014 at 5:25 am #15046
You are right, you can not trade at close, but I would also not trade directly at the next open, because then you have normally quite big variations. I would trade during the first 2 days of the month. It makes not much difference on the performance, because the allocation will most probably not change during these 2 days. Backtests have shown, that the price variations during this short period are rather random. If you trade for several months, then the differences to a trade at close of the last day of the month are more or less zero. But sure, if you look only at one month, there can be a big difference. The only important thing is to execute the rebalancing trades very near together.01/01/2015 at 2:01 am #15412ua87_SPParticipant
I am an international investor who uses Interactive Broker and cannot use margin and as you may know there is T+3 delay in settlements, so when I am rebalancing following the rotation signals, the sell part of rebalancing trades are okay, however I will not be able to execute the buy part of the rebalancing trades due to the T+3 wait period meaning I would have to wait at least 3 business days for the funds from the sell transactions to clear. This will puts parts the rebalancing trades by at least 3 days (some times even 4 days), is this okay?
Is there a solution to this? How would you guys (yourself and your partners) overcome this T+3 settlement delay which I believe is forced by all other brokers too unless you are using margin or keep like 50% of the funds in cash to be able to execute both sell and buy side together at the same time/day.
Fred01/04/2015 at 9:23 pm #15560Jeff McCarterParticipant
Hello, I’m a new subscriber to all of the strategies, and this month made allocations by Sharpe ratios which seemed a reasonable way to start. Since this strategy (MYS) has good [hypothetical] risk-adjusted performance, I’m prepared to allocate more heavily towards it. So I was a little confused by this annotation accompanying this month’s signals:
“For the moment I would not invest too much in this strategy. Better wait for the next bigger correction and then go in again.”
So I find this confusing. Doesn’t it defeat the purpose if we have to do our own market timing to decide when allocate more heavily to each strategy? I thought the whole idea was that these were “internally” risk-managed based on the ability to allocate more towards bonds (using short TMV as proxy in this case) and that this particular strategy was even more tightly risk-managed by re-balancing twice monthly. So, I’m confused at the admonition to shy away from the supposedly best-performing strategy unless you’re suggesting that the results thus far — and I understand they are hypothetical — are unlikely to be sustained?
I would appreciate your elaboration on this. And, as a new member, I find myself impressed by your site content and enthused about working with you.
As an aside, also very intrigued by the fund-of-fund logic in which algorithms would suggest varying allocations toward various strategies each month. Is it realistic to think that might be implemented anytime soon — do you have any time table?
Thank you in advance and kind regards,
Jeff01/04/2015 at 10:16 pm #15561
All strategies do take on risk, as they are not market neutral and you are “buying beta”. The good news is, they have a lower level of risk vs simply buying the indexes, for the reasons you have read about, including varying degrees of shifts towards low/inverse correlated assets, like treasuries.
Frank’s statement is a reflection of his valuable judgment and experience that later points in the coming months might provide stronger relative strategy returns, but does not include the optional crystal ball.
Historical results are quite real, starting from June 2013 when the strategy went live, however, performances going forward will shift with the market conditions. We are confident it will add value over time, but one should not expect a straight line of growth.
One can further reduce risk by further spreading around assets between strategies, and, managing how much assets are at risk. Of course, you might miss an opportunity. No free investment return lunch here, but we do strive to provide better quality lunches with ways to access at lower cost.
I hope this helps.01/04/2015 at 11:28 pm #15562
PS: Regarding the “fund of funds” strategy – which we internally call a “meta-strategy”; it is a high priority, already working in “alpha” form. We plan to offer a version in the next 2 to 3 months. Thanks for your interest – will keep it high on the list.01/05/2015 at 10:41 am #15576
Why not use or upgrade to a Reg T Margin or even portfolio margin account instead of using a cash account?
Alternative there is an IRA account that ‘clears’ and makes sale proceeds available instantly:
If these two choices are not viable I would suggest you contact IB support and explain what you would like to do. Maybe they have a suggestion.
Vangelis01/06/2015 at 6:38 am #15583ua87_SPParticipant
Thanks for your suggestion Vangelis.
I am not a US citizen so no IRA account for me and IB does not provide margin account (any sort) to residents of Australia!, they say this is temporary and they have no other solutions as per the customer support so I guess I just have to reserve something like 20% of the funds in cash and hope that the partial rotations signals does not exceed my reserved cash otherwise I would have to wait at least 3 business day to execute the buy sides.
Fred01/09/2015 at 4:42 pm #15666
It also depends on which strategies you are using. Some make smaller adjustments than others. If you are forced into a 3 day delay, keep in mind that historically the end of month days have a slight positive bias (good for selling) while 2nd to 5th days of the month are relatively weak, i.e. better for buying (even though this has recently changed).01/11/2015 at 10:18 am #15733Michel Alvarez-CorreaParticipant
My concern about this strategy is that it cannot be traded with large amounts of money. The daily volume of the ZIV, VXZ and EDV is quite low. The bid-ask spread is very high at most times. This results in execution costs that are unacceptably high if one trades, say, $1MM or more on this strategy (TMV is better as far as volume)
Have you tried studies which utilize ETF’s that have higher volume characteristics such as for instance the SVXY instead of the ZIV for instance. I know that SXXY is more volatile than ZIV but that could be compensated through the allocation.
My goal is to be able to eventually trade $3-$5MM per strategy. Do you feel that that is realistic? What are the strategies in your arsenal that are best suited to larger amounts of money?01/12/2015 at 7:42 am #15759
If you invest large amounts of money, then it makes sense to trade (short) the VIX (5/6 month) and UB treasury futures instead ZIV/EDV. These futures have a very high liquidity and are traded 24h a day. I personally always trade the underlying futures if you can do this for an ETF.
ZIV has quite a small volume, but underlying are very liquid VIX futures month 4-7. So also high amounts of ZIV can be bought without problems. The same is valid for EDV.
You can not replace ZIV, which is a medium term volatility ETF, with the high volume front month ETFs like SVXY, XIV, TVIX. These have a much higher volatility. ZIV has the much better return to risk ratio.
I think it is no problem to invest several millions in a strategy because most of the time the allocations do only change by 10-20% each month.
If you invest larger sums, then you should not buy all at open, but better accumulate slowly with limit orders. You have enough time to do the changes.01/13/2015 at 12:31 pm #15802Michel Alvarez-CorreaParticipant
Thank you for your prompt response. I would like to try utilizing futures instead of ETF’s as you suggest. However, I am having trouble understanding how many contracts to buy or sell.
Assuming that I want to trade $1MM on this strategy. Furthermore assuming 30% ZIV / 70% EDV and the June VIX contract at 19.50 and the March UB contract at 172, how many contracts should I short/buy of each?
Should I match the expiration of the UB contract with the VIX contract and buy June UB instead of March UB?
Should I switch contracts for the VIX futures once a month in order to keep a constant 5 month period to expiration?
Lastly, the back testing of this strategy does not extend the the “acid test” period of 2008 when the VIX reached 90. Do you have any idea of how the strategy would have performed then and what the drawdown would have been?
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