One of the principal challenges in managing investment strategies, or even quantitative strategies for that matter, is understanding why they can under perform. This week, the market was struck by increased volatility in Gold and Silver prices, before and after improved labor data announced on today. As volatile long bond and precious commodities can be, it is fascinating to see the interplay of market psychology and its effect strategy results.
ABSOLUTE RETURN – Original Strategy
First, one day does not make a trend and it is important to note that every single month of 2016 has presented challenges to bull and bear theses. As US equity indices make their daily grind towards higher prices, the lack of “oomph” has indeed been frustrating, forcing many investors to search for yield in places they would have out-rightly rejected 3 years ago. Not many would have predicted the 14.66% rally YTD in the iShares MSCI Emerging Markets ETF (EEM), or the 12.46% return in the iShares JP Morgan USD Emerging Markets Bond ETF (EMB). So much for the “best economy in a bad neighborhood” narrative! the S&P 500 is up only 5.89%! The S&P Midcap 400 Index has been “en fuego”, up a respectable 10.61%. The two assets used in the maiden Absolute Return strategy, PowerShares QQQ Trust ETF and iShares Barclays 20+ Year Treasury Bond ETF are up 5.01% and 15.92%, respectively. Utilized in the Absolute Return strategy, they have provided a 10.11% return YTD.
Some might be tempted to just pick an asset and park the money, but that would not maximize value. History and data have colluded to make very clear that passive investing is not the panacea one would hope, there has to be a combination of passive and active (not passive/aggressive, that’s for the shrink) investment management, to maximize returns and reduce indecision at critical moments.
In another laugher, the US Dollar Index is down -2.61% year to date. USD bulls have been wrong to insist that it continue to rally up. Much has been speculated regarding collusion between central banks to control the FX market. After all, in a globalized economy it is imperative to maintain “price stability”, even in FX. Well, that is one of the US Federal Reserves mandates, and it would behoove all CB’s to play the same game.
At the end of the day, FX levels will continue to be driven by confidence and confirmed by flows to different economies, something which has already begun, as evidenced by the research provided by Cross Border Capital (@crossbordercap) in the following graph.
Given all this information, it would seem plausible to consider adding other assets to the Absolute Return strategy, if not for the fact that the Nasdaq 100, or QQQ continues to outperform most other asset on a long term basis. Therefore, all I am focused on is managing the downside risk in QQQ, which done well provides a much better return than passive investing in QQQ or the S&P 500.
Year to date:
Since July 18, 2003:
ABSOLUTE RETURN – Incorporating Gold and Silver
Here comes the fun stuff.
Many claim that Gold is a currency. Historically, that has been the case and the fact that treasuries of many countries use gold as part of their reserves is a testament to the value of gold. It is surprising that it is not widely accepted by retail investors. Slowly, but surely, gold and silver are gathering acknowledgement in the investment community as necessary hedges and investments. Yes, there are other commodities that can be used to speculate on, but the exchange traded funds or notes are not as liquid as the two primary ETF’s for gold and silver, GLD & SLV.
In the Absolute Return strategy that incorporates the use of gold and silver, it was imperative to use indicators that have more than 20 years of history. Only then was I able to build a strategy that allowed me to analyze the behavior and derive a strategy that would provide returns that exceed the typical benchmarks. Readers can find more information in my previous post regarding this strategy.
Suffice it to say that the incorporation of gold and silver has been a pleasant surprise.
Year to date:
Since November 1, 1985:
The return of this strategy owes in large part to the performance of Silver. In the 32 weeks that have transpired this year, only 15 have been allocated towards a combination of the Nasdaq 100 and Silver. Still, this has provided the strategy a return of over 23%, thanks in large part to the 43.34% return in Silver. Needless to say, this quiets any arguments against the use of commodities in a concentrated strategy as this. The fact that it can exceed performance of most accepted investment indices make this a strategy that I feel quite comfortable with.
Have a wonderful weekend!