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Enhancement of the Treasury hedge in our strategies

For many years, most of our strategies used long term Treasuries (TLT, TMF) as a hedge against market corrections. These Treasuries have been a safe haven asset with negative correlation to the stock market and have been used successfully to reduce the risk/volatility of our strategies. With rising rates and inflation, long term treasuries lose a part of their value as a safe haven asset. Their hedging value depends mainly on the speed interest rates go up. If rates go up slowly and inflation stays low, then ETFs like TLT will still be a good hedging choice. To be on the safe side we diversified our strategy hedge.   Universal Investment Strategy UIS Our U.S. based Universal Investment Strategy UIS will have a hedge that can now choose between TLT and TIP. TIP is a very liquid inflation protected Treasury. TIP is less volatile than TLT and is a good alternative when TLT is heading lower. Here is a 10 year comparison between TLT (lower red chart) and the hedging algorithm which switches between TLT and TIP (lower black chart). In the year to date chart you can see how the allocation switches between TLT and TIP. Since October the hedging strategy is invested in TIP. The new UIS strategy allocates between SPY and the TLT/TIP hedging strategy. The annual return (CAGR) for the last 10 years has been 12.06% with a Sharpe ratio of 1.4. This compares with the performance of the original UIS strategy of CAGR 9.5% and Sharpe 1.1. So there is a clear improvement for the new strategy.   The Bond Rotation Strategy BRS The Bond Rotation Strategy BRS will be improved by also adding TIP as a 5th ETF. BRS did very well this year with a year to date performance of 11.36% and [...]

2017-10-02T20:00:00+00:00 By |41 Comments