Strategy: The BUG

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    Support and discussion thread for the strategy.


    I am considering subscribing, all my holdings are in an IRA. I can’t short sell but have access to all etf’s. Do your strategies advise for leveraged etf’s?


    Some strategies like UIS and MYRS do. You may want to try those, especially UIS which trades extremely liquid ETFs and corresponding 3x ETFs. The BUG does not as it uses ETFs that do not have a corresponding leveraged version (PCY, CWB). Always be careful with leveraged ETFs and use them with caution.


    Compared to the Universal Investment Strategy, which I’ve been able to get a ballpark replica on, these rules are far more opaque. What’s the specific historical volatility threshold? How do you adjust the weights? Regarding momentum, what’s the lookback period you use to measure it? How do you adjust your weights in light of that? What about mean reversion? One month lookback? How much do you sell that security off compared to its default 1/7th holding?

    Even with the 200-day SMA, well, okay, if the asset is below its 200-day SMA, do you simply not invest in it and reallocate its weight among the rest of the securities?

    In short, while the base idea is easy enough (rebalance an equally-weighted portfolio monthly), the innovations are very opaque. Care to clarify, as with the Universal Investment Strategy, so that I may be able to get in the ballpark to corroborate these results?



    As you know, the actual rules are far from opaque but we would rather keep a small percentage of the strategy rules/parameters private. This is what fellow partner Alex calls the ‘secret sauce’. I send you a note to clarify any questions you have.



    There seems to be something amiss with the “Bug – Leveraged” signal since current allocation is 0.



    Both BUGs use a moving average filter that rejects positions when an asset’s last price is below it. The two strategies MA periods differ by 10 days (240 vs 250 ). Interestingly enough all 7 assets are below the shorter (240) MA even though SPY and PCY are marginally so. On the 250 period, they are marginally above, so the BUG straight strategy does allocate to them while The leveraged version’s 240 day filter rejects all positions. Zero allocation feels strange but it is a testament to having all 7 assets under-perform, which in itself is historically a rare occurrence.

    Thomas Rennard

    I have been studying all your strategies as I am considering upgrading from just MYRS to an All Strategy Member.My question about BUG is, why on certain months do the allocations noT nearly reach 100%. Does this mean the balance is in cash and by “cash” does that mean the allocation is in SHY ? For example during the 12/31/15 to 1/29/16 period you show an allocation of 25% SHY and 21% PCY……Where is the other 54% of the money allocated during this period ?

    Tom R.


    The BUG will not allocate to an asset if that asset is in a long term downtrend, i.e. below a long term moving average. If at least 4 out of the 6 assets are above the MA, all is well and the BUG will allocate to the best ones (ranked according to a risk-adjusted metric) and reach a 99-100% allocation. But if for example TLT, GLD, PCY and TIP are in all downtrends, then the BUG will only allocate to SPY and CWB and not reach 100% allocation. This should makes sense: If many asset classes are in downtrend (ie mid to end of 2015) one should be conservative and reduce leverage.

    On top of the trend filter, there is a volatility filter. If a chosen asset shows volatility beyond a desired level, then it’s position size is limited. This may also cut an asset down in size even if all 4 ‘slots’ are filled. So you could have a 25% SPY, 25% TLT, 25% PCY and 21% GLD allocation if gold has been very volatile.

    Whatever is not allocated stays in cash (not SHY).


    Another naive question: why is BUG Leveraged considered a separate strategy? I understand that 3xUI is separate as it invests in different assets, but BUG lev is just a version of BUG? Can one use margin on other strategies and create Bond Rotation Lev and so on?


    The original strategy developed was the BUG as described here. It was designed for professional traders with Interactive Brokers or similar accounts that have easy and cheap access to 2x leverage. It is not leveraged but rather has an intelligent mechanism to be in the market from 0% all the way up to 200% depending on market conditions.

    Since many investors have no access to this type of account, we created a similar strategy that used no leverage and can be traded in a normal account. We call this the BUG ‘straight’ while the original was re-named as’BUG Leveraged’. The BUG ‘stright’ is a different strategy using ‘less intelligent’ leverage control (from 0% to 100% allocation) and only holds up to 4 assets (BUG Lev holds up to 7).

    So the BUG leveraged is not just a 2x version of the BUG.
    Bottom line is that if you have an IB account, trade the BUG lev if not trade the BUG ‘straight’.

    John Lawson

    This was a very helpful explanation. Are there any other circumstances we should be aware of with any of the other strategies if we are using IB?


    Have you considered adding foreign developed (and emerging) markets for additional diversification?


    We have but the Bug is a conservative and defensive strategy. It is a building block in our arsenal that has low correlation to our more growth oriented strategies. To achieve what you are suggesting we could create a strategy to allocate funds between the BUG and the World Top 4 strategies.

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