Hedged Bridesmaid strategy

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posted Jul 28, 2017

I read somewhere a vaguely described "Bridesmaid Strategy" in which you go long the second-best performing sector ETF of the previous year and supposedly that reliably beats SPY. It's a bunch of crap. It is not at all a reliable indicator. Depending on how you time the rebalance and the calculation it either just barely beats SPY or significantly underperforms, and generally exhibits quite a bit more volatility than SPY.

While messing around with the code though, I tried shorting the best performer as a hedge against market fluctuations. It seems the best performer has a tendency to mean revert while the second-best has a tendency to out-perform. Together they even out market volatility. So here's my hedged-variation on the Bridesmaid Strategy.

I think the problem with strategies like this that are based on general prior observations is that they are in their essence over-fit. It might continue to perform in the future... or it might not.

5 responses

Viridian Hawk

Jul 28, 2017

Here's a longer-timeframe, using TLT as the benchmark. Almost similar returns as TLT with significantly less volatility. Might be useful as a "risk-free" cash substitute?

John Oh

Nov 28, 2017

I find this phenomenon incredibly amusing. It doesn't beat the market, but it works. Thanks for sharing.

Viridian Hawk

Nov 28, 2017

It's continued to work since I posted it... but there's no reason why it couldn't fail in the future.

Also be aware that they're changing the sector categorizations next year: http://www.etf.com/sections/features-and-news/seismic-sector-shift-shake-30-etfs?nopaging=1

Daniel Cascio (Blue Robin)

Oct 2, 2018

hi Viridian, not sure if you're still pursuing this type of strategy but just wanted to check in on the results to date. I'm trying to add a ranking system by industry rather than sector to a fundamental long/short strategy but have not had much luck in the coding department.

Viridian Hawk

Oct 3, 2018

No, I think it's a terrible strategy. There aren't enough data points to make it statistically viable.

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