The Bug Leveraged

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The Bug Leveraged 2017-03-15T23:29:40+00:00

Project Description

This is a conservative strategy meant for long term, steady growth and low risk.
It is designed to cut down risk rather than chase returns.

It trades monthly and invests in any of these 7 ETFs:

A U.S. stock index (etf: SPY), long-term Treasuries (etf:TLT), Gold (etf:GLD), Convertible Bonds (etf: CWB), Inflation protected Treasuries (etf: TIP), Foreign Government Bonds (etc: PCY) and short-term Treasuries (etf: SHY). It also fits well with other strategies having a low correlation to our equity momentum strategies.

The strategy does not attempt to predict prices or the future state of the economy. It holds a broad diversified number of assets that complement each other, each performing well in a different economic environment.
It inherits part of its logic from Harry Browne’s tried-and-true Permanent Portfolio and the publicized workings of Dalio’s All-Weather portfolio.

It is designed to hold up well in periods of inflation, deflation, growth and stagnation. This is done by asset selection:

The 4 core assets are:
• Stocks (Broad U.S. Index)
• Long-term Treasuries
• Gold
• Cash or equivalent

The additional 3 assets are:

• Convertible Bonds
• Inflation Protected Treasuries
• Foreign Bonds

Volatility targeting per asset
We limit portfolio volatility by adjusting down the weight of assets whose historical volatility exceed a certain threshold.

Momentum
We progressively feed capital into the winners while starving out the losers.

Mean Reversion
We use a shorter time frame mean-reversion criteria as to cash in on temporary winners while getting discounts on assets exhibiting temporary weakness.

Timing
We use a timing rule to limit exposure to non-performing assets.

Leverage
The ‘straight version’ of the strategy uses no leverage.
The leveraged version of the ‘BUG’ uses adjustable leverage so that the strategy can be invested from 0% to 200%.

We have done extensive research and stress testing for this strategy. Backtests go back to 1992 and include different economic periods. You may refer to our PDF section for a detailed historical analysis.
PermPort_4Funds_ALL_2x_since92vaSPY
Used assets:

  • US Market (SPY – S&P 500 SPDRs)
  • Long Duration Treasuries(TLT – iShares 20+ Year Treasury Bond)
  • Gold(GLD– Gold Shares SPDR)
  • Cash or equivalent (SHY – 1-3 Year Treasury Bonds)
  • Convertible Bonds(CWB– SPDR Barclays Convertible Securities)
  • Inflation Protected Treasuriess(TIP– iShares TIPS Bond Fund)
  • Foreign Bonds(PCY– PowerShares Emerging Markets Sovereign Bond)


Risk and Performance Profile

Risk Score:?
Performance:
3 Months12 MonthsSince Inception
Return
CAGR
Volatility
DrawDown
Sharpe
Annual Performance vs. Benchmark

For a more thorough analysis of this strategy refer to the PDF  “Will we ever kill the Bug?” in the whitepaper section.

The BUG strategy is one of our more conservative strategies. The strategy does not attempt to predict prices or the future state of the economy. It holds a broad diversified number of assets that complement each other, each performing well in a different economic environment.

These assets are:

  • US Market (SPY– S&P 500 SPDRs)
  • Long Duration Treasuries (TLT – iShares 20+ Year Treasury Bond)
  • Gold (GLD Gold Shares SPDR)
  • Cash (SHY-iShares 1-3 Year Treasury Bond)
  • Convertible Bonds(CWB– SPDR Barclays Convertible Securities)
  • Inflation Protected Treasuriess(TIP– iShares TIPS Bond Fund)
  • Foreign Bonds(PCY– PowerShares Emerging Markets Sovereign Bond)

It inherits part of its logic from Harry Browne’s tried-and-true Permanent Portfolio and the publicized workings of Dalio’s All-Weather portfolio. It is designed to hold up well in periods of inflation, deflation, growth and stagnation.

Visually you can see that these assets are somewhat uncorrelated, thus providing ample diversification.

Asset ETF Relative Chart mediumSize

 

 

Tactical Layers

We don’t really want to predict what will happen in the future. But we do want to adapt to a changing market. We know that periods of inflation, deflation or stagnation do not last for days or weeks but rather months and years. The Economy cannot shift between major fundamental regimes that quickly.

So what we are looking for is adaptability. A way for the strategy to overweight or underweight our assets based on what is happening.

Let’s take a historical example. Gold was in a bull market from 2000-2012. So during those 12 years there was no reason why a strategy couldn’t have slowly scaled into Gold. Currently Gold is in a correction (or bear market, depending on how you look at it) so there is no reason the strategy should hold the full 14.28% position.

One such obvious ‘tactical’ layer is mid to long-term momentum. We will use 5 such layers:

Volatility targeting per asset

We limit portfolio volatility by adjusting down the weight of assets whose historical volatility exceed a certain threshold.

Momentum

We progressively feed capital into the winners while starving out the losers.

Mean Reversion

We use a shorter time frame mean-reversion criteria as to cash in on temporary winners while getting discounts on assets exhibiting temporary weakness.

Timing

We use a timing rule to limit exposure to non-performing assets.

Leverage

The ‘straight’ version of the strategy uses no leverage.

The leveraged version uses adjustable leverage so that the strategy can be invested from 0% to 200%.

Below is a backtest of a 4-only asset strategy from 1992- November 2014.

PermPort Funds ALL sincevaSPY Medium

 

 

For a more thorough analysis of this strategy see my PDF  “Will we ever kill the Bug?” in the whitepaper section.