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I’m guessing it’s because I’m trading this in an IRA account, which doesn’t allow margin.
This would mean the return and DD numbers would be cut in half, since it looks like I’ll be using 2x the capital that the C2 model account is using. Stated another way, it would be like scaling the strategy to 50%.
It makes sense, and I forgot about the leverage part in the description.
FWIW then, that means the unlevered CAGR is 30% or so. In some of the early posts on this thread above, posters were expressing disbelief that the strategy could generate 60%+ returns annually. The detail that was forgotten was that this backtested return was done using 2:1 leverage.
fiveHedged is significantly finetuned, and evolved from added factors such as (1) EV/Book vs EV/BookIndustryMean, (2) Debt/Capital ratio’s across peers, plus (3) adapted Piotroski score. The new strat is the result of considerable added research/analysis (and better data).
Decided to suspend any trading on C2 for a while during this development - hence let the other system run down without updates or subs, fiveHedged is a more fully tested/ready strategy which successfully combines multiple factor-based algorithms with a permanent 1:1 hedged portfolio.
My only concern now would the epic backtest that was shown before, followed by a system that went under.
Again, this is why I don’t put much faith in backtests posted on the forums.
I guess we’ll see. Still wish people would stop changing their user names and hiding their past…
Respectfully, the original method did not ‘go under’. From time to time, I discover valid potential improvements based on fundamentals (cash-flow, profit/loss, balance sheets). For instance, fiveHedged is a strategy that additionally incorporates EV/BookValue for each company and compares the ratio to the industry/peer median, placing [more potentially undervalued] stocks nearer the top. This results in a superior method, with much lower drawdowns as the companies are already near the bottom in terms of EV/Sales valuations.
I also want to keep companies with higher-then-peer debt ratios out, at a time when interest rates are likely to rise, hence added a debt/capital ratio comparisons to the algo…
The results provide better ‘quality’ stocks in the top-five. It is this type of approach that has led to letting one [profitable] system drop, and replacing with the better more fundamentally-robust method (fiveHedged).
All of this is an effort to provide the best strategy that I can.
In future [as I have learnt] closing a strat down is not a good idea - it is better to keep fiveHedged up to date, with any valid (fundamentally based) tweaks/updates posted in the strat-description.
Fair point. Trust me there is nothing hidden or any negative motive in the namechange. I prefer the brand name fiveHedged (username) as it more accurately represents (in a word) the fact that my strat is hedged. I just prefer it. Anyway, hope to continue delivering results that count
I see the benefit of being fully hedge as you described last month. But your backtest of being up 60%+ annually while fully hedge still yet to be seen. Every trader would love to be hedged at all times but at what cost ?
The strategy I use is primarily for finding the right stocks to trade - it is factor-based using multiple (actually 12) fundamental/technical mix rules. I personally prefer the full hedge despite the cost as it allows peace of mind. Not every trader would use a hedge, some partially hedge their positions and vary according to how overbought the market becomes (eg., x standard deviations away from the benchmark).
There is no getting away from the cost of hedging. I can - if you like - run a sim/backtest (for what it’s worth, but it’s a good place to start) comparing a non-hedged vs fully hedged strategy. The drawdowns will differ significantly, which is one key reason the hedge is absolutely necessary imo.
I am confident we will beat the S&P as the strat [based on backtests] has always done so since 2000+ (caveat: clean/trustworthy data was available only from 2007 onwards, so I do not place as much reliability on pre-07 data). 2018 was tough but we were ahead the S&P significantly, so I am expecting this to continue.
I feel the markets itself will be negative through much of 2019, as it has to [almost by force] adjust to the quantitative-inflation, but value-companies can still be found and even more so. One interesting point I want to share is an indicator I devised which looks at the ratio of value-companies which qualify based on the 12-point algo I use, relative to historical averages. The equilibrium is around 8.2%. When the number of value-companies exceed this equilibrium, the S&P tends to reverse/rally into a bull market. I also add to this the coppock-curve as a long terms cyclical measure. Looking at these inputs right now, there is still some room left for the market to correct, before a stronger bull run will manifest. Best guess would be at least one or two quarters, and interest-rate expectations factored in.
TBH I sense our well-intentioned team at C2 are trying hard to maintain a reasonable level of service, but it is def not what it used to be. Not to mention the glitches with the dashboard (often lasting entire weekends), delayed fills, etc. Hopeful all this ‘streamlining’ will pay off in the end.
This is an interesting situation. In my analysis of the original fiveHedged from two weeks ago, it was clear that the cost of hedging so far has been dragging down results relative to periods of positive S&P performance, and that all the outperformance of the strat so far has been due to shorting S&P during downswings. The past two weeks (since my Jan 3 post) confirm this trend, with an additional -$4k in underperformance relative to the S&P 500.
The new fiveHedged LIQUID strategy is doing somewhat better… it has only underperformed the S&P by a bit more than $2k since it started Jan 3. And it’s trending upward; the original fiveHedged is down over that same period.
My conclusion remains that the cost of hedging here is very high in live trading, wonderful backtests notwithstanding. I would love to be proved wrong, but would suggest that a more prudent approach would be a more modest hedge (ie, less than 100%) that can smooth out the equity curve a bit, without ruining it altogether.