Why are many strategies so defensive?

[Peticolas]

Although you are doing well, I’m a little puzzled why your strategies seem so defensive. Take NASDAQ 100 for example. It is typically a 60/40 portfolio with 60% in high momentum stocks. But it is now 40% invested in low volatility stocks and 60% invested in the hedge. It’s described as a momentum strategy with a mean reversion component.

Why is this (and other strategies) so conservative right now? Momentum is still pretty strong and indicators like RSI are in the middle of their ranges. Do you use data other than price data in your models?

[alexmech]

Very curious to the same question

[Frank1 Grossmann]

The reason we are 60% invested in the Hedge and only 40% in the Nasdaq strategy is that the Hedge had a better Sharpe ratio (risk weighted return) than the Nasdaq strategy. I know that our strategies are rather risk adverse, however you are free to reduce the hedge or even just invest only in the unhedged Nasdaq strategy. Just click on the Nasdaq balanced unhedged strategy and use this to invest.
regards Frank

[Peticolas]

Thanks Frank. I just wanted to get an intuition for the moves within the strategies. I assume NASDAQ 100 equity piece went to its low volatility portfolio for the same reason.

[Peticolas]

I’ve used Sharpe ratio to assess the risk adjusted returns of past performance. I’ve never read that it was useful as a predictive indicator. Do you know of any articles or books that discuss that, Frank?

[Frank1 Grossmann]

Trend Following Strategies are very popular. For a single index it is OK to use just historical performance as a predictive indicator. However, if you compare different stocks and asset classes, you have to take account of the volatility and therefore you have to use a risk weighted return (eg sharp ratio). Without this, it would, for example, also be impossible to compare performances to leverage ETFs.

[Peticolas]

Thanks for the response, Frank. Yes, it’s common in finance literature to standardize returns by dividing returns by the standard deviation of those returns. That’s pretty similar to the Sharpe ratio except it ignores the risk-free rate.

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