I appreciate this, yes, we are good!
RWM also makes the strategy IRA friendly, which opens it up to more potential subscribers.
Busy morning! All done for this Monday - no more transactions for 7 days. We are long five stocks, fully hedged by RWM. A Happy New Year to all my valued subscribers!
We are up 0.8% today (fully hedged) - thanks again largely to the RWM hedge position.
Quick heads-up - I will be launching my ‘liquid’ version of fiveHedged (separate strategy) this month, just going through final checks/data. This will be exactly the same rules as fiveHedged, but focus on only S&P500 stocks (for max liquidity).
Please PM me for the full 11 year backtest results 2008-2018 inclusive.
In your backtests, when did you start using the most recent financial data for each company?
That is, Company A reports 3 weeks after quarter end, Company B two week after that, etc. Did your backtests incorporate the up to date data only when it had been reported?
I ask because I saw some one else dabble in quant only to realize they were working with historical quarter-end data weeks before it was actually available at the time. Skewed results quite a bit when a stock is ‘cheap’ in a model when it isn’t incorporating blow-out quarterly results yet!
Thanks. Congrats on your success thus far.
That is a very good question, and one that I raised a query about with my data provider some years ago. All results they publish via their server are based on ‘post-release’, hence if a company reports even 3 weeks later than end of quarter or expected date, the information is released immediately after the announcement. There is no retrospective entry to the database. This is important and reassuring, especially for research and backtesting purposes.
fiveHedged LIQUID Launched Today - focused on S&P500 Stocks
By popular demand, I have now launched the fiveHedged ‘Liquid’ version of the fiveHedged strategy. This can be found here…
The method is based on the same principles/logic as the original strategy, but focuses purely on ‘liquid’ S&P500 stocks.
A full PDF of the 11 year backtest results can be provided on request - please direct message me.
Brief Desription of the fiveHedged Liquid Strategy…
Portfolio holds five S&P500 stocks, refreshed every 4 weeks.
Fully hedged by the S&P500 Ultrashort ETF (Symbol: SDS).
Very low margin used (maximum 2:1).
All 5 stocks are liquid, easy-to-trade S&P500 companies.
Each weekend, we apply a precise 12-rule stock screen, designed to capture the strongest free-cash-flow generating S&P companies, with sustainable growth. The screen automatically ranks every qualifying company into a ‘top-five-stocks’ sort-order, using a precise free-cash-flow-yield formula…
The company which generates the highest sustainable free-cash-flow (relative to historical average) is ranked number one. The company with the next highest score is ranked second. And so on…
The top 5 stocks are bought/held over a 4 week period.
To hedge against market risk, the five-stock portfolio is always fully hedged by a 50% position in the S&P500 Ultrashort ETF (symbol: SDS)…
For instance, if we buy 5 stocks at $2,000 each (total $10,000), the position is hedged by a 50% long position ($5,000) in SDS, providing a market-neutral, fully-hedged portfolio.
I like this strategy so far, but especially because it’s performing well in the down market we’re having. What remains to be seen is how well it does picking the stocks that will outperform the market when the market swings strongly higher. So far, when you look at the record of week-long swings up and down, the upswings have underperformed, significantly vs the cost of the hedge:
Oct 26 - Nov 7 upswing, strategy underperform by -$1000
Nov 7 - Nov 26 downdraft, strategy outperform by +$4000
Nov 26 - Dec 3 upswing, strategy underperform by -$3500
Dec 3 - Dec 24 downdraft, strategy outperform by +$10,000
Dec 26 - Jan 3 upswing, strategy underperform by -$2000
======= net outperform ~$8500 vs SPX =======
So hat tip for the excellent hedging, which so far seems to have provided the alpha for this system! This strategy seems an excellent choice for the current market conditions. But I think it remains to be seen how well it performs during market upswings with any substance, whether the stock picking alpha exceeds the 100% hedging costs.
Lets hope this will bring forth more hedging strategies instead of the continuous streams of pure trading strategies which mostly seem to collapse in a short time due to these volatile markets.
In stable markets pure trading strategies will outperform hedging for sure but who wants to keep watching over the strategies every day?
Got my attention with this liquid portfolio. Best of luck!
I just subbed to fiveHedged and there’s something about the scaling that doesn’t make sense to me.
The model account shows a balance of about $54k. However, if you add up the equity values of the six individual positions, you get about $100k, and this is in fact what I’m seeing in my IB account as well. I’m scaled at 100%.
Can anybody explain this? Maybe I’m missing something obvious again.
@PhilD1, he does indicate in his strategy’s description the following:
“Very low margin used (maximum 2:1).”
Can you send me more detail - so we can figure this out (there is some margin usage on the hedge side). PM me when you’re free.
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%.
If the 5 stocks are $50k (total) and the hedge is $50k, that would make sense. (assuming the hedge is the inverse ETF thing). Would make perfect sense.
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.
A 30% CAGR is more believable than a 60% CAGR.
I am very interested in seeing the backtest for your new hedged strategy with S&P 500 stocks. Thanks. My email is email@example.com. Lee Bobbitt
Hi Lee - I will get that to you by close today.
which raises the question - is the below system or any other system on your other username same as your current one ?
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.