Rushi's strategy
Here's the other submission from yesterday. Michael Hauck's modification of a volatility term structure strategy:
https://www.quantopian.com/posts/javols-just-another-volatility-strategy-dot-dot-dot
Backtest ID: 57e6a3372eca7a104761422c
Attached is the analysis of Rushi's backtest, using Pyfolio.
His algorithm holds long and short positions in USO and GLD which hold near term oil futures and physical gold respectively. It's a pair trade, originally attributed to Ernie Chan, which uses the co-integration of Gold and Oil prices, both of which are related to inflation.
Pros:
- The strategy performs well 2011 through 2013, with an excellent Sharpe ratio of around 1.5, and a low maximum drawdown of 13%.
- Leverage is well controlled, at most 100%, and annualised volatility at 16% is similar to the stock market in that time period.
- Low beta to the stock market at -4%.
Cons:
- The strategy seems to break down in late 2014, and has been in a deep draw-down since.
- Position concentration in just two ETF, increasing counter-party and event risk, and making it less attractive for a hedge fund in my opinion.
Attached is my analysis of Michael's backtest. It's a modification of this strategy, which trades on the term structure of volatility futures.
Pros:
- Like Rushi's strategy, it performs well with a Sharpe of 1.5, and a low maximum drawdown of 7%.
- Leverage is also well controlled, at 50-100% of capital.
- It uses long duration bonds to diversify the market beta, and it doesn't load on the traditional factors of size, value or momentum, leaving room for further diversification.
Cons:
- The strategy's returns are not very consistent, as evidenced by the high kurtosis (over 60 in this sample). Most of the out-performance, relative to the market, is in a short period in late 2015.
- The strategy has a relatively high beta of 32%, making it less attractive as a diversifier to a traditional asset portfolio.
- It has a similar issue with position concentration to Rushi's strategy.
And the winner is...
Michael Hauck!
It was a close call, but unfortunately I think the USO-GLD pair trade may be gone forever, whereas selling volatility insurance looks like it can still contribute to a traditional portfolio.
Well done Michael! Please contact Delaney to claim your prize.
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