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It certainly is dis-concerting to see the Bond Rotation strategy being very near the bottom of the rankings for the month. This should be a relatively low risk strategy and yet it is right down there near Maximum Yield and the SP500. Being in retirement, this hurt a lot. I could have been in the Nasdaq 100 and weathered the storm much better. It certainly brings up the question of whether the hedges for this strategy are proper. Another point: I understand that Logical-Invest cannot give out investment advice, but there must be a way to alert subscribers to look very closely at the components within each strategy under what happened with the recent circumstances. I think a lot of us who use Logical Invest do so to not have to follow what is happening every single day, but only once a month. We are depending on the hedges to smooth things out intra-month. I don’t really want to track every component of a strategy daily to see that the strategy is failing within the month.
We are also very unhappy with the BRS performance. This is one of our oldest strategies performing well since years even during market corrections like 2008, so we did not want to change a winning horse.
The difference of this older strategy is, that it selects freely between bonds and has not a fixed hedging part. Even in 2008 this worked well however this drawdown was much steeper and bonds worldwide were crashing because of missing market liquidity. This is a sort of „black swan“ event for bonds which never happened before during our 20 year backtesting horizon. Now we learned the hard way, but we certainly will adapt also this strategy, so that it is always hedged with US Treasuries and something like this does not repeat in the future.I guess my assumption was that the strategy was hedged by using TLT and Tips to hedge the more volatile bond funds like JNK and PCY.
Yes, this normally happens automatically in a crisis as the strategy looks for the bond pair with lowest volatility. However this time the bond liquidity squeeze came too fast and such very fast events can in fact only been handled if a fixed allocation of Treasuries is always in place. This increases security, however it also lowers return during periods where Treasuries did not perform well, like the 3 years from 2016-2018. During this period Treasuries like TLT lost and BRS did manage to achieve a 30% performance by excluding these rate sensitive Treasuries. But for us it is clear that capital protection is more important and so we will also install the permanent hedge for BRS. Personally I also think that a “black swan” event like a huge nuclear or biological terror attack in a big city is possible and if this happens over the weekend, then the stock market could well open 30% lower on Monday. There would be no time to install a hedge in time.
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