Algorithm was developed based on the paper of
http://seekingalpha.com/author/harry-long/articles

Backtested more thoroughly on my blog, quantStrat Trader.

Long story short: you would have gotten destroyed in the crisis. This is basically a 3x leveraged stock/bond portfolio.

Hi Ilya,

What do you think about this approach http://seekingalpha.com/article/2452505-improved-defensive-measures-for-simple-equity-treasury-hedge-strategies?

Regards,
Ed

Hey Ilya,
How much different do you think your backtest is because you used TLT and XIV instead of VXX and TMV?
Shorting VXX appears to be much more profitable than buying XIV, like your backtest does.
Even when you account for TMV's leverage, its returns vary from TLT's.

Ed, the approach you linked to is a small variation on the Ivy portfolio which is go long close above the 200-day SMA, but instead uses an SMA5, if I'm interpreting the article correctly. The Ivy Portfolio is a well-known approach and if someone just wants to get those simple exposures, then sure, why not?

Paul, I used those instruments because they go back far enough for me to get a simple concept illustration. And I think you mean long XIV. And yes, I realize there may be a slight difference in return, but no matter which instruments you used, that strategy would have gotten hammered in the crisis. So just because something's slightly less unacceptable doesn't mean it's still not in the realm of unacceptable.

Ilya
I have been spending much time on Reuters recently looking at what some of the biggest US and UK balanced funds achieved in practice. It is fascinating to look at some of the drawdowns out there and the consequent MAR. One example: a fund formed way back in 1992. around 3% CAGR on price, around 7% with dividends / coupons re-invested. Max DD 22%.Std Dev for the whole period around 6%.
After so many years in this business you have to conclude that quantitative analysis can only take you so far since even if we live in a deterministic universe, market are complex systems which are effectively unpredictable (at least given our current knowledge and technology).
Quite agree on leverage. The only real protection you have is 1) diversification and 2) don't use leverage.
Even then the future will hold surprises. The Ivy Portfolio is hopelessly simplistic based as it is on a tiny handful of instruments - even though those instruments represent broad asset classes.

Almost all articles out there on the retail oriented web tell a tiny part of the story. Over time, almost everybody f**** up under hitherto unseen conditions. Look at QIM - long touted as a miracle. Or Cantab Partners. We are all fallible.