The opinions expressed in these forums do not represent those of C2, and any discussion of profit/loss is not indicative of future performance or success. There is a substantial risk of loss in trading. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. You should read, understand, and consider the Risk Disclosure Statement that is provided by your broker before you consider trading. Most people who trade lose money.
LATEST UPDATE (1st April)…
(1) Portfolio is up 6% thru March (fully hedged, pure-alpha, low-risk, max 2x margin).
(2) Breaking new ALL-TIME record high today.
Posted Friday (29th March)…
Another 100% winners day. All 5 stocks up significantly. And RWM hedge also up (bonus!) despite general market weakness…
Strategy entering new record high…
@fiveHedged Compliments for the scientific approach to trading, I like that! That may lead to discussion, which is usually great. But in the end, results have to speak for themselves and they clearly do. I was wondering, did you bring investors yourself to C2? Your investor base is really impressive within such a short time frame. I’ve seen strategies with good numbers for several years with almost no investors.
Which ones? I’d be curious.
I think part of the reason @fiveHedged has a good amount of subscribers, besides the pretty good performance & insane backtest results, is the perceived low risk of blowing up since he is effectively market neutral.
Hi Raoul,
I have my own long established database of investors, mostly from my writings on seekingAlpha, and other forums. I can’t quantify exactly where C2 subs originally came from, probably a mixture of my own db, and C2 investors.
Having said this, at present, the number of subs on C2 is relatively lower than I expected, especially based on the positive performance (and low-risk 100% hedging rules) of the strategy so far…
Key Stats Include…
(1) 6/7 months profitable so far (85.7%).
(2) 9.3% ax D/D.
(3) Fully Hedged by RWM, true 1:1 long:short.
(4) 1.7x Profit Factor.
(5) 2.75 Sharpe Ratio, 4.65 Sortino Ratio.
(6) Low Correlation to S&P500 (0.034)
I am expecting strong performance to continue over the long term, and hoping to see more subscribers here - which should naturally flow as a direct correlation to continuing ‘longer term’ performance.
What convinced me to subscribe more than anything else was the discussion around the strategy on this forum, despite lack of trade history on C2. The trade leader posted many backtests, answered tons of questions, and went into detail about how his strategy does what it does. After reading dozens of posts on this thread and also the thread where he introduced the strategy, I felt I had a really good sense of what this strategy is about, it made sense to me, and the whole concept and execution was being professionally managed. That’s how the trade leader got my buy-in. So far, so good.
I’ve always favored hedging systems. It does take skill to manage though but there is far less risk when its hedged. Hedging does guarantee profits but it does reduce huge loss.
If a trade leader can manage it well that would be a good place for conservative investors. However, there are those investors that only like 100%+ yearly returns so hedging systems would not favor those investors.
Thanks for the positive words Phil…
It has measurable value as it re-inforces that cyclical motivation to carry on delivering (which basically means - in this case - absolute discipline/professionalism in sticking to the plan/strategy).
Talking about “insane” backtest results (just out of interesting observation)…
I thought I’d test out the same fiveHedged strat using 2x leverage, eg., buy double the stocks, double the hedge with the same startup capital in Dec 2007 to the present date. See where it goes…
Insane is probably correct description.
$10K to $843,874,630.18
Of course, take with a pinch of salt (purely for interest/observation)…
Lol…as we know backtest results are totally useless as a forecast of future profits. You should dive into why the results are so good.
Its the leverage - higher risk/higher returns, plus 100% re-invest compounding. It’s nuts how the numbers throw you - I could backtest all day (often do! I know I need to expand my horizons) - very addictive.
As @fiveHedged said, it’s the leverage. The edge of that backtest is about 0.3, which is good but not jaw dropping. Look at the drawdowns (blue line). There is a 40% drawdown that takes a while to recover from in 2009.
It’s taken a couple of weeks, but VHI finally paying off!
fiveHedged strategy NEW record-high today (100% hedged, pure-alpha)…
Charles,
I also cannot see how a strategy that is 50% betting on one direction on 5 stocks and 50% hedged against that direction with an index ETF would perform nearly as well in backtesting as one that is 100% betting on the direction on 5 stocks. At least for very profitable strategies (in which being right on the direction generates huge profits) that near equivalence would seem to be mathematically impossible.
We now have almost 4 months of autotrading on FiveHedged since the first autotrade on Dec. 21, 2018. Though the strategy has done very well since midnight on Dec. 21 (+9.7%), it has underperformed the S&P 500 (SPY is up +21.0%).
And FiveHedged has over twice as big a drawdown (-9.3%) as the S&P 500 over the same period (-3.4%). Thus, since autotrading has begun, FiveHedged has a less than half the alpha and more than twice the beta.
Now I want to repeat that FiveHedged has performed very well, and almost any hedged strategy should underperform is a market that goes straight up. Its advantages should be easier to see once a more normal choppy market returns, when it would be expected to at least have a lower beta.
To see what I am talking about, go to FiveHedged and move the left slider on the chart to 00:00 on Dec. 22. You will see that the S&P 500 line shows more return and smaller drawdowns.
When I measure fiveHedged versus the S&P starting on Oct 26, when the strategy went live, I get very different results - roughly double the return of the S&P with roughly half the drawdown.
If you measure starting on Dec 22 then you’re effectively cutting out 2/3rds of the Oct to Dec bear market, in which the strategy did well.
Backtests are backtests, and there are many ways that bias can be accidentally and invisibly introduced. Assuming the backtesting software itself has no bugs, user choices can still override sanity, and I don’t believe @fiveHedged has discussed backtesting details publicly. In particular, for the fiveHedged strategy, what comes to mind as possibilities are:
Future-peeking in the form of survivorship bias: how is the universe of equities chosen, and is the universe dynamically populated to avoid survivorship bias? By way of example, choosing today’s biggest 1000 symbols by market cap and backtesting those same symbols for the past ten years is totally bogus… you’ve skipped that baddies who dropped out of the top 1000 over that time period (cherry-picking) and included hotshot genius stocks who came from nowhere to storm into the top 1000 (more cherry-picking).
Future-peeking in the form of fundamental data reporting times. Most quant strategies use price action (OHLC) and technical indicators based on prices as their basis, and there’s no issue with when those data are timestamped. But fiveHedged is a fundamental algorithm based on company reported (and perhaps other-reported) figures, most of which come out on earnings dates (not at neat quarterly ends) and sometimes are prefaced with earnings warnings (we’re not making guidance, sorry!) or followed up with revisions (oops!), making for very difficult datestamping of quarterly changes in company fundamentals. Since fiveHedged looks for the five or so top actors weekly by its proprietary formula, it would seem (to me) fraught with possibilities for picking up underpriced stocks where the fundamentals got accidentally misreported.
I suspect both these avenues of bias are well known to the developer and should not be present in these backtests… but my suspicions about the smell test here are high, hackles are raised. But using extensive fundamental data adds many new degrees of freedom to the data quality picture, that only the best professional quality data sources should be able to handle. Further, even then were this my strategy I would scour the backtest for individual big gaining trades and try to suss out just why the algorithm got those trades right without any future-peeking. New company fundamental data tends to get baked into the market price pretty darn quickly, I have always thought. This strategy suggests otherwise.
I’m reading this again…are you sure you’re thinking about this the right way? To me, 99% return unhedged and 85% return hedged means the return on the short hedge is -14% per year (85% minus 99%), not +71% per year. Off the top of my head this difference seems to be roughly the inverse of what the stock market has returned over that time period.
Who knows. To me it just seems that if you ignore rebalancing and assume half your portfolio grows 99% a year and half of it shrinks at -14% you would have 0.5 x 99% + 0.5 x -14% = 42.5%. Obviously there are some gross assumption like ignoring rebalancing through the year and the ability of the hedge to preserve buying power during downturns. I have been very impressed by fivehedged and his results. It just seemed odd that the difference between hedged and non hedged was so small even though it puts half the capital to use betting against the market instead of applying 100% to the bullish stock selection. It may be 100% accurate it just seemed surprising to me.
Phil: I started counting at the end of the very first day on which there was autotrading.
I’m not arguing that only performance since autotrading started counts, but it is the most relevant. I wish that weren’t so (after all, we’d all be fabulously rich here if we could count on pre-autotrading returns being reliably borne out in the future).
I also pointed out that a straight-up market since autotrading started is not a good market for testing a hedged strategy such as FiveHedged.
FiveHedged looks like an excellent strategy, even though the slight differences in backtesting between 100% hedged and 0% hedged are probably mathematically impossible.
Your example is exactly correct. I think that people are so persuaded that FiveHedged is a wonderful strategy (which it may very well be) that they are not thinking clearly.
Assume you have $10,000. If you invest all $10,000 in a LONG stock strategy that yields 99%, you have $19,900 at the end of the year.
If instead you invest $5000 in a LONG strategy that yields 99% and $5000 in a SHORT market ETF strategy that loses 14%, you have $14,250 at the end of the year (a 42% return, not an 85% return). This is in effect the example you offer.
To get an 85% return for a 100% hedged strategy, you would have to get a MUCH LARGER return for an unhedged strategy.
For example:
If instead you invest $5000 in a LONG strategy that yields 184% and $5000 in a SHORT market ETF strategy that loses 14%, you have $18,500 at the end of the year (an 85% return).
If that were so, then a 100% unhedged strategy would have to yield something like 184%, not 99%. You would have $28,400 at the end of the year.
My best guess for how the difference in returns between 100% and 0% hedged backtests can be so small is that he is comparing:
this strategy: 50% LONG 5 stocks and 50% SHORT the market
with
this strategy: 50% LONG 5 stocks {not 100% LONG 5 stocks], nothing SHORT.
I know, it’s a head scratcher. I’ve read through this thread probably 10 times over the past few months.
For what it’s worth, even though he claims his system is unleveraged, he is in fact live trading on 2:1 margin and this is also how he did the backtests. If you read back through his posts carefully you’ll catch it. I’m 100% sure of this because I’ve been running fiveHedged in a cash IRA account and I need 2x the money that the model on C2 uses to have 100% position scaling. So, that 42.5% is really 85% if you use 2:1 margin like the developer has used. Or, looked at another way, the unleveraged hedged backtest performance is 42.5% CAGR and the unleveraged unhedged backtest performance is 50% CAGR.
