The team at Gestaltu recently published two posts on their site regarding an upcoming paper titled “Tactical Alpha: A Quantitative Case for Active Asset Allocation”. Such a paper would be interesting to me as my ETF momentum strategy is based on active asset allocation. The first post discusses a means of evaluating the performance of active asset allocation strategies and provides an explanation for why the authors believe the appropriate means is to calculate alpha generated using a passive global index as the benchmark. This post describes how they arrive at the composition of a global passive index with ETF’s and factor tilt.

In their second post, the authors provide performance evaluations for eleven global tactical asset allocation products and seven global risk parity products. The global tactical asset allocation products delivered an average of -1.43% alpha and the global risk parity products delivered an average of 1.51% alpha. Keep in mind that alpha was calculated based on a global ETF benchmark comprised as per the table below.

Passive Global ETF IndexNext up for me is to calculate alpha for my ETF momentum strategy using the same passive global benchmark. In this post, I describe how to calculated Jensen’s alpha in Excel.

Jensen Alpha

The good news is that my model generated an annual alpha of 2.52%. It has to be kept in mind, however, that my model performance results are really a backtest – actual trading started at the beginning of November and is being tracked on Collective2 under the name “Pure Momentum”. The chart below illustrates the performance of my live trading versus the S&P 500 so far.

Pure MomentumThe caveat with the analysis done here and by Gestaltu is that the evaluation period is rather short but there is no getting around that as the active asset allocation products are relatively new. I do take comfort in learning that my model generated a higher alpha than 14 of the 18 products Gestaltu evaluated.

@fjpenney

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If you take your personal and online security seriously, as you should, I highly recommend that you listen to this Tim Ferriss podcast with Marc Goodman. It just may give you the motivation you need to get a password manager and make changes on your computer that you hadn’t thought about.

@fjpenney

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Mebane Faber (@MebFaber) asked his followers in a recent tweet for ideas for his forthcoming book or white paper.  Having been convinced of the validity of ETF momentum trading, one of my concerns is that the anomoly gets arbitraged away as it is being talked about more and more. Therefore, I responded to Mebane by asking him to discuss whether any of the momentum models that will be in his book/white paper are showing signs of being arbitraged away.

Having a backtest of the ETF model I now use for a portion of my own account, it made sense for me to determine if my model is being arbitraged away. I hadn’t done that sort of test before but thought of a method that should be valid. If my momentum model doesn’t offer an edge over buying equal amounts of each of the ETF’s I select from then the difference in returns between my model and an equal weight model should be zero or less than zero. I calculated the difference between my model’s monthly return each month and the return of an equal weight portfolio.  Then I calculated the twelve-month trailing average of the difference between the two returns and plotted it.

ETF Momentum Model Improvement

What jumps out in the above chart is the outperformance of my model during the 2008-2009 crisis. Having listened to Katherine Kaminski in recent podcasts discuss “crisis alpha” which is a phrase I believe she coined to be defined as profits made by exploiting trends in markets during times of crisis I couldn’t help but think that ETF momentum models deliver crisis alpha in spades. Of course, it would be beneficial if I could perform my test over a longer period of time but that is difficult given the short history of some of the ETF’s I trade.

As momentum trading is related to trend following and Katherine (Katy) believes that trend following provides crisis alpha, it should be no surprise that ETF momentum trading really shines during a crisis.

FJP (@fjpenney)

 

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As the result of degrading performance of some of my systems in October, I am now on a no-stock diet! For whatever reason, stock strategies have not done well lately.  According to Josh Brown, my experience has been common amongst stock pickers this year.

I traded ETF’s only in November and produced a 5.0% gain and remain ahead of the IASG Systematic Trader Index.

Systematic Trader Versus Index

As always, my trading results are provided by Collective2 from my “The Systematic Trader” system.

FJP

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