Dynamic Rebalance Strategy

Uncorrelated asset-classes dynamically rebalanced with strategic long volatility exposure to maximize returns

How it beats passive

Growth of $10,000$39,229$312,612$1,202,933
Annualized Return (CAGR)9.97%26.93%39.39%
Annualized Volatility20.35%15.93%21.2%
Sharpe Ratio0.491.691.86
Ulcer Performance Index0.75.75.23
Max Daily Drawdown-55.2%-16.87%-25.75%
Max Monthly Drawdown-50.8%-14.43%-20.49%

Summary Statistics

The power of geometric growth can be seen with how the conservative and aggressive variants returned 8.0 times and 30.7 times returns of the SP500 respectively.

The sharpe ratio (return per unit of risk) of both the conservative and aggressive variants are 3.4 times and 3.8 times that of the SP500 respectively.

In addition to this, our strategy avoids the huge drawdowns that SP500 has had during recessions. (instead benefiting from the long volatility exposure)

The monthly and annual returns of the aggressive variant of the backtested strategy since 2006 are given in the table. Months with more than +2% returns are highlighted green and less than -2% returns are highlighted red.

We have been live-trading the aggressive variant of the strategy since May 2018 except for the long vol component (please contact us for those results) and with the long vol component since April 2020.

The conservative and the aggressive version of the strategy had a maximum monthly drawdown of 12% and 25.9% respectively compared to the maximum monthly drawdown of the SP500 at 50.8%.

1 Month41.04%53.18%
3 Months35.67%57.31%
6 Months37.5%59.52%
1 Year45.68%69.14%
3 Year44.2%85.51%
5 Year44.74%98.25%
7 Year43.33%100.0%

What are base rates?

Base rates are the batting average of a strategy. A base rate of 60% for monthly returns means over all rolling periods of a month, the strategy beat the SP500 60% of the time.

Notice how the aggressive variant beats the SP500 over almost all 5 year rolling periods and all of 7 year rolling periods.

The conservative variant lags the returns of the SP500 in almost all rolling periods, but still outperforms the SP500 with higher overall returns and lower drawdowns as shown before.

The scatter plot shows how the aggressive strategy’s daily returns are very uncorrelated with SP500 returns. 

Additionally, the convex impact of tactical long volatility exposure can be seen when the SP500 daily returns are very negative. It is during these times where our strategies truly shine. Traditional asset classes correlations all go to 1 during these times. This is exactly where long volatility exposure gives us the most benefit.

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