Strategy Management Page
• What is a Strategy?
A
Strategy, in the context of
AlphaDroid Strategies,
is a set of up to 12 mutual
funds or ETFs along with an
indicator
algorithm
to evaluate the performance of each to determine which
one, and only one, is currently demonstrating leadership
and should be owned.
Click the picture to the right to view the layout and
functions of the Strategies Management page. This is where your
investment Strategies are managed. To go to the Strategies Management page, click the
Account Management tab
on the top menu, and then the
Strategies tab
on the second level menu. The Strategies on your page are yours alone to manage and edit.
A
Custom Strategy is simply made by editing any of the
ticker symbols in an existing Strategy, adding new
ticker symbol to a Strategy, or deleting an existing
ticker symbol from a Strategy. All of these actions are
initiated by clicking the ticker symbol (or blank) to
open the popup window to "Find a Mutual Fund, or ETF." The popup window enables you to search by either
ticker symbol or by words in its name. To add it to your
Strategy, click the
button. The popup window also provides a
means to delete the current ticker symbol by clicking
.
As shown above, when you place the mouse pointer above a
ticker symbol, its name, pertinent hold days, and early
trade fees are shown. At each step of your Strategy
development you can check its progress by clicking the
chart icon, and selecting other properties of the
Strategy by clicking the
information icon.
Making a Strategy-of-Strategies
A
Strategy-of-Strategies uses special ticker
symbols to refer to your other Strategies. As with a
normal AlphaDroid Strategy, it will pick the one, and
only one, best performing Strategy from among up to 12
candidates. Use the
ticker symbol
format of ADnnn, for AlphaDroid# nnn,
where nnn does not have a leading zero if it is less
than three digits. You can also mix normal ticker
symbols with the Strategy ticker symbols if you like.
When you initially create a Strategy-of-Strategies, there will be
an option to check to designate it as a
Strategy-of-Strategies... be sure to
select it to enable it. All
Strategy-of-Strategies must reside in Strategy rows #501
and higher, and all normal Strategies must reside in
Strategy rows #1 to #500.
Algorithm Automation Simplicity! Although
indicator algorithms
can be complex and difficult to understand and
configure, the good
news is that we have totally automated the indicator
algorithm configuration for each Strategy according to
the character of your chosen funds.
There are significant differences in the behavior of
mutual funds, bonds, and stocks. For example,
commodities, such as oil and gold, will behave
differently from the stocks of companies that
manufacture consumer goods, or from funds holding
T-bills or certificates of deposit (money market funds).
AlphaDroid automatically determines the algorithm and
parameters most appropriate for the character of each
Strategy so you don't have to.
That's why we say "Our computers will do the hard work
while you go have a life!" Just throw a
set of funds at it, and AlphaDroid automatically
figures out how best to treat them.
Strategy Performance: Score- Safety-MDD
These performance metrics are shown with
each Strategy for easier comparison. The definition of
these performance metrics can be found in the
Score, Safety,
and MaxDrawdown sections of this
User Guide.
Add Strategies to Your List The Strategies Management page contains your personal list of up to 10
Active Strategies for which Trade Alerts are sent
and may require a subscription fee, and up to 20
Sandbox Strategies
which are for experimental evaluation, but neither send
Trade Alerts nor require a subscription fee. There are
three ways to add a Strategy to your list:
1. Select ready-made Strategies by
clicking the Strategy
icon and considering the Strategies presented in the
Select-A-Strategy popup window. Click the row of the
Strategy to select it, then click the
button
at the bottom of the page to add it to your Strategies list.
2. Import a
Strategy using a Strategy-ID by clicking the
Strategy
icon, pasting the Strategy-ID into the text
box at the upper right. Then click the
button above the text box. To send a Strategy-ID to a
friend, click the Information
icon to find the Strategy-ID, then copy and paste it
into an email.
3. Assemble
your own Custom Strategy
by clicking the
ticker symbol positions in the Strategy List and
selecting
one from the many thousands of
mutual funds or ETFs on
the list that pops up. Additional details
and tips for building great Custom Strategies are detailed below.
View Trade Signal History for a Strategy
You may view the Trade Signal History for
a Strategy by clicking the
History icon. The Trade Signal History, as pictured to
the right, should not be confused with the Actual Trade
History found in the Trade Information section of the
page. The Trade Signal History is what the Strategy
algorithm says one should have done to achieve the
results portrayed on the charts.
The list shows the
entire history of trade signals, days held, performance
for each holding compared to the S&P 500 and the
cumulative value for both the Strategy and S&P 500 had
you invested $10,000 in each at the start of the
available data for the Strategy.
The generic
symbol
$CASH is used when
StormGuard directs you to
move to the safety of a money market fund. Not
everyone has access to the same money market funds, and
they are all pretty much like "peas in a pod", so
whatever your brokerage has available will work just
fine.
At the bottom of the listing you can click the
button to download a CSV (comma separated variables)
spreadsheet of all the important Strategy
statistics and trade signal history. Add "/d"
to the end of your Strategy Name to further add daily
data for the Strategy and the reference fund. (Note:
make sure the "/d" shows up in the name on the chart
because if the name is too long and it is cut off the
extra data will not be generated.)
Correct Interpretation of History Data:
A
common misinterpretation of the Trade Signal History
data is that each line reports
performance associated with the BUY fund. The correct
interpretation is that it reports the status on the date
found in the left hand column. On the day of the Trade
Signal Date, one has only just bought the BUY fund. Thus
the performance data reported relates to the SELL fund. A good reminder
of this is the 4th column title "Days
Held (fund sold)." Thus, when
you click to view the example above-right, the
proper interpretation is: On Jan 31st 2011 AlphaDroid
signaled to
BUY EWY and to sell IIH which had been held for 248
days. During the 248 day period from May 28, 2010 to Jan
31, 2011, the S&P 500 returned 19.5% and the Strategy
returned 23.0%.
View Strategy Performance Charts You may
view the current performance charts for a Strategy by
clicking its
Chart icon. In a single view, five separate charted
measures of risk and return performance are provided, as
described in the
About AlphaDroid Charts section
below.
Fresh charts are
made within a few seconds whenever you make a change to
a Strategy to enable evaluation of the change's effects.
Fresh charts are also produced: (a) during daily data
update processing, (b) when a Strategy is imported to
your list, and (c) when you change a fund in the
Strategy or change its Minimum Hold Time (see below)
Strategy Information The Strategy
Information popup window contains these elements:
• Strategy Name editing so you can
rename it to something meaningful to you.
• Strategy Minimum Hold Time to
control when a Trade Alert can be issued.
(See notes
just below.)
• Strategy-ID for you to copy
and paste into an email so a friend can import
an exact
copy of the Strategy.
• Strategy Classification to indicate
the investment style. For your reference
only,
it doesn't affect the Strategy.
• Group assignment to
be included with others in a project or account. The
list of Strategies can be filtered to show only these Strategies.
• Minimum Hold Time
There are seven choices for the Strategy Minimum Hold
Time, as listed below. You can select one in the
Strategy Information popup window by clicking the
Information
icon to the right of the Strategy name. This
parameter can be used to make AlphaDroid's
algorithms comply with minimum hold time
requirements, whether imposed by a particular fund, or
by a particular investment plan. For example,
most mutual funds and ETFs have no minimum hold time.
However, Fidelity Sector Funds all have a 30-day minimum
hold time with a 0.75% early trading fee, most Fidelity
International Funds have a 90-day minimum hold time with
a 1.5% early trading fee, and all 529 College Savings
Plans have a one-year government mandated minimum hold
time.
AlphaDroid maintains a file of the minimum hold time
and early trading fee for hundreds of popular funds. However, there are many thousands of funds available. If
we have the information for your fund, it will be listed
in the right column of the Find-A-Fund popup window on
the Strategies Management page, or in the screen tip text that appears when your mouse
pointer is placed over the ticker symbol to display its
name. When
AlphaDroid knows the minimum hold time for a fund, it
is incorporated into the trading algorithm only if the
"Trade Automatic" setting is selected. Currently we have
the minimum hold information for Fidelity, Vanguard, and
American funds. In the future, on request, we will add
such information for other funds of importance to you to
support your custom Strategies.
AlphaDroid generates a new Trade Alert when trend
leadership changes according to the Hold Time Option
selected:
• Trade Automatic
-
Trade alerts issue at month, but will wait
additional months if a fund hold time is > 30 days.
• Trade Any Day - Trade
alerts issue immediately, but you'll be warned if a fund
hold time is violated.
• Trade Weekend - Trade
alerts issue on the weekend only, but you'll be warned
if a fund hold time is violated.
• Trade Month End
- Trade alerts issue at month end only,
but you'll be warned if a fund hold time is violated.
• Trade if > 30
days - Trade alerts issue if current
fund has been held at least 30 days.
• Trade if > 60d
- M.E. - Trade alerts issue on Month End if current
fund has been held at least 60 days.
• Trade if > 90d
- M.E. - Trade alerts issue on
Month End if the fund
has been held at least 90 days.
• Trade if > 1yr
- M.E. - Trade alerts issue on
Month End if current fund has
been held at least 1 year.
Note:
Trade Automatic is the default
setting for a good reason. Not only does it watch out
for special hold time rules for funds, but it also
trades month-end, which almost always performs better
than
Trade Any Day
because it can be shown that the trend
signals actually do become more reliable around the end
of the month when many fund managers start making next
month's changes. This is documented in the
Hurst
Exponent Fingerprint section of the Sector Rotation Theory page. If you are anxious to have a faster
responding system, please read about
The Faster Response False Dilemma.
Note:
Changing Minimum Hold Time will
cause the algorithm to re-evaluate and determine what
the best parameters are for the Strategy, and could
result in using a longer or shorter trend measurement
period, and consequently a possible change in the one
designated as the trend leader. Determining the trend
leader depends heavily on the period of time over which
the trend is measured. Imposing a holding period imparts
a delay effect much like changing the trend measuring
time constants, thus it should be expected that changing
the Minimum Hold Time rule will case a change in the
optimum trend measuring time constants.
• Fund Ticker Symbols
By clicking the position of a ticker symbol,
the Find a Fund or
ETF popup window will appear
and enable you to search by either ticker symbol or by
words in its name. To add it to your Strategy, click the
button. The popup window also provides a
means to delete the current ticker symbol by clicking
.
As shown above, when you place the mouse pointer above a
ticker symbol, its name, pertinent hold days, and early
trade fees are shown.
Mutual Funds & ETFs:
There are in excess of 12,000
mutual funds and ETFs available to choose from.
Please contact us
if there is a mutual fund or ETF that is
important to you but is not on the list. We will
do our best to make it available provided it has at
least 3 years of data.
The reason for requiring 3 years of
data is that AlphaDroid's algorithm cannot properly
characterize a fund that has not seen a variety of
market conditions, and you risk the possibility of
unexpected Strategy behavior in the future. If you must
have a fund or ETF with shorter duration history,
you may be in love with it for the wrong reason. The
right reason is having increased probability of higher
returns and decreased probability of loss. A sexy name
and low introductory fee is not a sound reason for a
financial marriage — long-term character matters.
Note: Ticker Symbol Changes Causes
Re-Optimization: Each time you change one of the ticker symbols,
AlphaDroid will re-make your Strategy chart so you can
immediately see the effect of your changes.
Note: Changing any
ticker symbol or the Strategy minimum hold time causes AlphaDroid to
re-evaluate and determine what the best parameters are
for the Strategy, and could result in using a longer or
shorter trend measurement period, and consequently a
possible change in the one designated as the trend leader.
Determining the trend leader depends heavily on the
period of time over which the trend is measured.
Performance ranking last week is not the same as
performance ranking last month. Consider that there are
many routes to your favorite restaurant, and right now
there is an optimum set of roads in the route. But that may
change if some roads are closed and new ones are opened, or
if you impose a rule for how frequently you can make a turn.
Likewise in a Strategy, there are often multiple
sequences of ticker symbols that produce fairly similar
results, and
small changes to the Strategy can cause a different
sequence to
become the optimum sequence.
Extended History Ticker Symbols
The data history length of each of your Strategy ticker
symbols can have a profound effect on the projected
performance of your Strategy. For example, if you are
modeling a Strategy with the original 9 SPDR sector ETFs
and you want to see if additional safety is afforded by
adding either IEF or TLT (treasury fund ETFs) to the
Strategy, you will quickly note that neither of these
ETFs has data that extends back past mid-2002 and thus
they cannot suitably model performance of the intended
Strategy during the 2001-2002 market crash. Matters are
even worse if you want to use the UBT (2x treasury ETF)
because its data does not start until January 2010, thus
making it impossible to model performance during either
of the two recent market crashes.
One solution to the problem of satisfactory modeling is
to create artificially extended versions of
important modeling symbols. Some of these symbols
can be artificially extended by adding on older data
portions taken from another fund that can act as a proxy
for this fund during earlier periods. Leveraged 2x and
3x ETFs require the use of a scale factor when extending
them using 1x data. However, 2x and 3x ETFs have
other characteristics that require a scale factor
somewhat less than would be expected from its name. The
main cause of this problem is volatility, which causes
daily rebalanced ETFs to decay over time (go ahead ...
Google that). The scale factors we used were derived
from actual performance comparisons during generally
rising markets (which is the only time the relative
scale factor matters with True Sector Rotation). These
extended ticker
symbols have a "-" added to them to indicate they are
extended versions. A list of the
available extended history ticker symbols follows:
Extended History
Ticker Symbols
Symbol |
Name |
Start Date |
Orig. Date |
Extension Method Used |
SHY- |
Treasury, 1-3 Year |
1-2-1992 |
8-1-2002 |
VFISX |
IEI- |
Treasury, 3-7 Year |
1-2-1992 |
1-1-2007 |
IEF- + SHY-) / 2 |
IEF- |
Treasury, 7-10 Year |
1-2-1992 |
8-1-2002 |
VFITX |
TLH- |
Treasury, 10-20 Year |
1-2-1992 |
1-1-2007 |
(VFITX+VSUSX) / 2 |
TLT- |
Treasury, 20+ Year |
9-1-1988 |
8-1-2002 |
VUSTX |
UST- |
Treasury (2x), 7-10 Year |
1-2-1992 |
1-1-2010 |
IEF- x 2 |
UBT- |
Treasury (2x), 20+ Year |
9-1-1988 |
1-1-2010 |
VUSTX x 2 |
TYD- |
Treasury (3x), 10 Year |
1-2-1992 |
3-1-2009 |
(TLH- + IEI-) x 1.5 |
TMF- |
Treasury (3x), 30 Year |
9-1-1988 |
3-1-2009 |
VUSTX x 3 |
FNBX- |
Treasury, Fidelity FNBGX |
9-1-1988 |
10-10-2017 |
VUSTX |
AGG- |
US Aggregate Bond |
1-3-1995 |
1-1-2004 |
VBMFX |
BND- |
Vanguard Total Bond Market |
9-1-1988 |
4-11-2007 |
VBMFX |
BLV- |
Vanguard Long-Term Bond Index |
1-15-1986 |
4-11-2007 |
VBLTX |
CORP- |
PIMCO Inv. Grade Corp. Bonds |
11-1-1995 |
9-21-2010 |
PRPIX |
MUB- |
iShares National Municipal Bond |
9-1-1988 |
9-11-2007 |
MANLX |
MBG- |
SPDR Mortgage Backed Bond |
9-1-1988 |
1-27-2009 |
FGMNX |
HYG- |
High Yield Corporate Bond |
1-3-1995 |
3-1-2007 |
AHITX |
JNK- |
Barclays High Yield Bond |
1-2-2004 |
1-2-2008 |
AHITX |
EFA- |
EAFE International Index |
2-1-1996 |
8-17-2001 |
BTAEX |
EAFA- |
EAFE International Index |
1-24-1996 |
8-17-2001 |
BTAEX |
GLD- |
State St. ETF
SPDR Gold |
1-3-1995 |
11-18-2004 |
GD-PM x 1 |
GDX- |
VanEck Vectors Gold Miners |
1-29-1993 |
5-23-2006 |
BGEIX |
UGL2- |
ProSh. Ultra 2x Gold |
1-29-1993 |
12-03-2008 |
GD-PM x 1.75 |
PSQ- |
Short QQQ NASDAQ 100 |
9-3-1998 |
7-1-2006 |
RYOCX x -1 |
QQQ- |
NASDAQ 100 Index |
1-3-1995 |
3-5-1999 |
RYOCX |
SH- |
Short S&P 500 |
9-3-1998 |
7-1-2006 |
SPY x -1 |
SH88- |
Short S&P 500 |
9-1-1988 |
7-1-2006 |
SP-CP x -1 |
SDS- |
ProSh. UltraShort S&P 500 |
1-29-1993 |
7-14-2006 |
SPY x -2blv |
SHGD- |
50% SH and 50% GLD ETF Pair |
9-1-1988 |
7-1-2006 |
50%
SH88-, 50% GD-PM |
SHUG- |
50% SH and 50% UGL ETF Pair |
1-29-1993 |
7-1-2006 |
50%
SH88-, 50% UGL- |
TLGD- |
50% TLT and 50% GLD ETF Pair |
9-1-1988 |
7-1-2006 |
50%
TLT-, 50% GD-PM |
AGQ- |
ProSh.Ultra 2x Silver |
5-1-2006 |
12-3-2008 |
SLV x 1.75 |
BIB- |
ProSh.Ultra 2x Biotech |
1-2-2004 |
4-8-2010 |
IBB x 1.95 |
DDM- |
ProSh.Ultra 2x Dow30 |
1-2-2004 |
6-22-2006 |
DJ-30 x 2 |
DIG- |
ProSh.Ultra 2x Oil & Gas |
1-2-2004 |
2-02-2007 |
DJ-OG x 2 |
EFO- |
ProSh.Ultra 2x MSCI EAFE |
1-2-2004 |
6-04-2009 |
EFA-X x 2 |
EET- |
ProSh.Ultra 2x Emerg Markets |
1-2-2004 |
6-04-2009 |
EEM x 1.75 |
ERX- |
Dirxn Energy Bull 2X |
1-2-2004 |
11-06-2008 |
XLE x 1.9 |
EZJ- |
ProSh.Ultra 2x MSCI Japan |
1-2-2004 |
6-04-2009 |
EWJ x 1.95 |
LTL- |
ProSh.Ultra 2x Telecom |
1-2-2004 |
3-27-2008 |
IYZ x 1.8 |
KRU- |
ProSh.Ultra 2x Regional Banks |
1-2-2004 |
2-4-2010 |
IAT-X x 1.95 |
MVV- |
ProSh.Ultra 2x MidCap400 |
1-2-2004 |
7-1-2006 |
MDY x 2 |
QLD- |
ProSh.Ultra 2x QQQ |
1-2-2004 |
7-1-2006 |
QQQ x 2 |
ROM- |
ProSh.Ultra 2x Technology |
1-2-2004 |
2-02-2007 |
XLK x 2 |
RXL- |
ProSh.Ultra 2x Health Care |
1-2-2004 |
02-2-2007 |
IYH x 1.85 |
SSO- |
ProSh.Ultra 2x S&P500 |
1-2-2004 |
06-22-2006 |
SPY x 2 |
SAA- |
ProSh.Ultra 2x SmallCap600 |
1-2-2004 |
1-26-2007 |
SML-X x 1.95 |
UBR- |
ProSh.Ultra 2x Brazil Capped |
1-2-2004 |
4-29-2010 |
EWZ x 2 |
UCO- |
ProSh.Ultra 2x Crude Oil |
1-2-2004 |
11-25-2008 |
OIL x 2 |
UCC- |
ProSh.Ultra 2x Consumer Services |
1-2-2004 |
2-02-2007 |
IYC x 1.85 |
UGE- |
ProSh.Ultra 2x Consumer Goods |
1-2-2004 |
2-02-2007 |
IYK x 1.85 |
UJB- |
ProSh.Ultra 2x Bond Hi-Yield |
1-2-2004 |
3-1-2011 |
JNK- x 2 |
UPV- |
ProSh.Ultra 2x FTSE Europe |
1-2-2004 |
4-29-2010 |
IEV x 1.95 |
UPW- |
ProSh.Ultra 2x Utilities |
1-2-2004 |
2-02-2007 |
XLU x 2 |
UGL- |
ProSh.Ultra 2x Gold |
1-2-2004 |
12-03-2008 |
GD-PM x 1.75 |
UGL2- |
ProSh.Ultra 2x Gold |
1-29-1993 |
12-03-2008 |
GD-PM x 1.75 |
URE- |
ProSh.Ultra 2x Real Estate |
1-2-2004 |
2-01-2007 |
IYR x 1.75 |
USD- |
ProSh.Ultra 2x Semiconductors |
1-2-2004 |
02-02-2007 |
SOX-X x 2 |
UYG- |
ProSh.Ultra 2x Financials |
1-2-2004 |
2-02-2007 |
IYF x 1.8 |
UYM- |
ProSh.Ultra 2x Basic Materials |
1-2-2004 |
2-02-2007 |
IYM x 1.8 |
UWM- |
ProSh.Ultra 2x Russell2000 |
1-2-2004 |
1-26-2007 |
IWM x 1.9 |
UXI- |
ProSh.Ultra 2x Industrials |
1-2-2004 |
2-02-2007 |
IYJ x 1.85 |
DZK- |
Dirxn Dev Markets Bull 3X |
1-2-2004 |
12-17-2008 |
VTMNX x 2.75 |
EDC- |
Dirxn Emrg Markets Bull 3X |
1-2-2004 |
12-17-2008 |
EEM x 2.7 |
FAS- |
Dirxn Financial Bull 3X |
1-2-2004 |
11-06-2008 |
XLF x 2.5 |
DFEN- |
Dirxn Aerospace & Defense 3X |
1-2-2004 |
5-01-2017 |
FSDAX x 3.0 |
DPST- |
Dirxn Regional Banks 3X |
1-2-2004 |
8-18-2015 |
FSRBX x 3.0 |
EURL- |
Dirxn FTSE Europe Bull 3X |
1-2-2004 |
11-22-2014 |
IEV x 3 |
CURE- |
Dirxn Healthcare Bull 3X |
1-2-2004 |
6-5-2011 |
IYH x 2.75 |
MIDU- |
Dirxn MidCap 400 Bull 3X |
1-2-2004 |
1-8--2009 |
MDY x 2.75 |
GASL- |
Dirxn Nat Gas Rltd Bull 3X |
1-2-2004 |
7-14-2010 |
FSNGX x 2.7 |
DRN- |
Dirxn Real Estate Bull 3X
|
1-2-2004 |
7-16-2009 |
IYR x 2.75 |
RETL- |
Dirxn Retail Bull 3X |
1-2-2004 |
7-14-2010 |
RLX-X x 2.5 |
SPXL- |
Dirxn S&P500 Bull 3X |
1-2-2004 |
11-1-2008 |
SPY x 2.75 |
SOXL- |
Dirxn Semicondct Bull 3X |
1-2-2004 |
3-11-2010 |
SOXX x 2.75 |
TNA- |
Dirxn SmallCap Bull 3X |
1-2-2004 |
11-06-2008 |
RUS-X x 2.8 |
TECL- |
Dirxn Technology Bull 3X |
1-2-2004 |
12-17-2008 |
XLK x 2.75 |
JNUG- |
Dirxn Junior Gold Miners Bull 3X |
1-2-2004 |
10-01-2013 |
FSAGX x3.0 |
NUGT- |
Dirxn Gold Miners Bull 3X |
1-2-2004 |
10-01-2010 |
FSAGX x 3.0 |
GUSH- |
Dirxn Oil and Gas Expl Bull 3X |
7-01-2006 |
6-01-2015 |
XOP x 3.0 |
NAIL- |
Dirxn Homebuilding Bull 3X |
5-05-2006 |
9-01-2015 |
ITB x 3.0 |
PILL- |
Dirxn Pharmaceuticals Bull 3X |
6-23-2005 | 11-16-2017 |
PJP x 2.8 |
TPOR- |
Dirxn Transportation Bull 3X |
10-10-2003 |
5-08-2017 |
IYT x 3.0 |
LABU- |
Dirxn Biotechnology Bull 3X |
2-15-2006 |
6-01-2015 |
XBI x 2.75 |
UGLD- |
Credit Suisse ETN 3x Gold |
1-2-2004 |
10-17-2011 |
GD-PM x 2.6 |
UDOW- |
ProSh. UltraPro 3x Dow30 |
1-2-2004 |
2-11-2010 |
DDM- x 1.35 |
UMDD- |
ProSh. UltraPro 3x MidCap400 |
1-2-2004 |
2-11-2010 |
MIDU- x 1 |
TQQQ- |
ProSh. UltraPro 3x QQQ |
1-2-2004 |
2-11-2010 |
QLD x 1.4 |
URTY- |
ProSh. UltraPro 3x Russell2000 |
1-2-2004 |
2-11-2010 |
UWM- x 1.3 |
UPRO- |
ProSh. UltraPro 3x S&P500 |
1-2-2004 |
6-25-2009 |
SPXL- x 1 |
VIXY- |
VIX Short-Term Futures |
4-1-2004 |
10-4-2011 |
For a detailed explanation for how this data was
extended, please see this article:
XIV historical data and pricing model since VIX
futures are available (2004)
You may also enjoy reading
Easy Volatility Investing by Tony Cooper. |
VXX- |
VIX Short-Term Futures |
4-1-2004 |
10-4-2011 |
VXZ- |
VIX Mid-Term Futures |
4-1-2004 |
10-4-2011 |
VIXM- |
VIX Mid-Term Futures |
4-1-2004 |
10-4-2011 |
SVXY- |
Short VIX Short-Term Futures |
4-1-2004 |
10-4-2011 |
XIV- |
Short VIX Short-Term Futures |
4-1-2004 |
10-4-2011 |
ZIV- |
Short VIX Mid-Term Futures |
4-1-2004 |
10-4-2011 |
Tip
#1. One of the better uses for the
long-term treasury ETFs is with StormGuard as the
Bear Market Symbol
so that when StormGuard triggers, instead of
going to the safety of $CASH (your favorite money market
fund), you will instead receive a trade alert to buy the
specified Bear Market Symbol.
Since long-term treasuries are negatively correlated to
the S&P 500, you can generally expect a bit of a
performance improvement when implemented. Click to
expand the Treasury ETFs comparison chart (right)
showing the significant difference between these ETFs,
and their differences in character from the S&P 500.
Numerous ready-made
Bear Market Strategies have been designed
to span the range of aggressiveness and address the
problem that long-term treasuries
have not always been negatively correlated
to stocks.
Tip #2.
The 1x ETFs in the pink section were extended to provide
better Strategy modeling in conjunction with Strategies
using SPY, MDY, and the original SPDR sector ETFs, all
of which have histories that go back to the mid/late
1990s.
Tip #3.
The 2x leveraged ETFs in the grey section and the 3x
leveraged ETFs in the orange section were extended to
have a common start date of 1/2/2004 so they all could
participate in the initial tuning of the Strategy, as
opposed to effectively tuning for one set of ETFs, and
then starting forward walk with a different expanded set
of ETFs that may not play together well in the same way.
Your objective, as a Strategy designer, is to provide
the algorithm with a truly representative sample of
Strategy characteristics prior to the specified BornOn
Date so that it can properly tune itself.
Tip #4.
The VIX futures contract ETNs in the bottom section
aren't for the faint of heart. We've posted an example
Strategy on the
popup list entitled "A Nose for VIX." While it has
posted strong returns, its volatility is quite high. It
may inspire contemplation (over a glass of red) whether
these funds have completely crossed the line from that
of investing to gambling. There is not even a remote
connection to owning a piece of a company's assets or
earnings. Ah, but in the end, is it really any different
from owning a pack of faceless companies in a fund that
you trade for another pack in just 30 days proving you
really are just betting on the froth rather than loyally
supporting development of a worthy, innovative
corporation?
• BUY/SELL Trade
This is where the trade details can be viewed,
including: (1) the trade signal date and
BUY/SELL
ticker symbol information, (2) a red
button to acknowledge completion of the recommended
trade and to inform AlphaDroid that you have completed
the task so that no further reminder emails will be
sent, and (3) a green
button to indicate that you have already acknowledged
the most recent trade. If you find you acknowledged a
trade in error, click the
Strategy Trade History icon where you will find the
button to undo the trade acknowledgement status in our
system (not the actual trade at your brokerage). Since
Portfolios will sometimes select the same fund in more
than one of its underlying Strategies, options for the
2nd and 3rd best choices are provided should you wish to
maintain greater diversity.
$CASH, $WAIT, -NEW-
When StormGuard indicates it is time to move to/from the
safety of a money market fund, it uses the generic
symbol $CASH
for the Buy/Sell ticker symbol because not everyone has
access to the same money market fund. When you see
$CASH,
substitute your favorite money market fund. When
creating a new Strategy it is important to choose a good
entry point into the Strategy's recommended fund. If
there are only a few days until the next likely Trade
Alert or if the last recommended Buy ticker symbol has a
short-term trend that has gone negative then
AlphaDroid's algorithm will use the
$WAIT
symbol to indicate you should wait a bit for a better
entry point into the Strategy. In both case there will
be important and specific trade advice offered by
clicking the
icon. The -NEW-
ticker symbol will appear as the SELL symbol for new
Strategies that have no prior recorded history of trade
acknowledgements to specify what you actually do own and
should sell.
Warning or Special Trade Advice If there
is a special situation regarding the recommended trade,
the
Warning icon appears instead of the
icon. When you click the icon, the warning message will
be displayed. The message could be generated for
numerous reasons, including: (1) the current fund you
own may have a stronger trend signal than any of the
funds in the new Strategy you have just selected, (2)
one of the funds in your Strategy is defunct and should
be deleted or replaced, or (3) you have just created a
new Strategy and special advice is offered.
Trade Options Information
If there are no special considerations associated with
the suggested trade, the
Trade Options Information icon appears to the right of
the
button, to let you know that there are multiple options
for how one might respond to the recommended trade. When
the Option Information icon is clicked, the following
text is displayed:
You have four options for acknowledging this trade: Make the trade and then return
here and click the Acknowledge Trade button so
AlphaDroid will no longer send you email reminder
Trade Alerts.
2. Delay making the trade until a later
or better time and don't click the Acknowledge Trade
button until then.
3. Reject this Strategy in favor of
another Strategy by clicking the
Strategy icon and selecting a new Strategy from the
list.
4. Exit for the sidelines to sit in
cash (any money market fund) for a while by changing to
the Free Strategy called
Sidelines In Cash. Click the
Strategy icon select the
Sidelines In Cash
Strategy.
View Strategy Trade History You may view
the history of trades you have made in a Strategy by
clicking the
History icon in the Trade Information column. Unlike the
"Trade Signal History" controlled by the Strategy
algorithm, this is a list of all trades you have
acknowledged, rejected, or that still may be pending. It
is a log of your activity for this particular "bucket of
money," not a list of "trade signals" for the Strategy.
If you acknowledged a trade in error, click the
button on this screen to undo the trade acknowledgement
status in our system (not the actual trade at your
brokerage).
Delete a Strategy from Your List To delete
a Strategy, click on the
Delete icon on the far right of the Strategy line. You
will be asked to confirm that you really do want to
delete the Strategy before it is removed. The first
Active Strategy has a grey icon indicating you cannot
delete the first Strategy - but you can edit it or
import another Strategy over it.
Strategy Charts
• Logarithmic Price Chart
A logarithmic price chart has the advantage of vertical
interval spacing that provides the
same percentage change for each interval.
On a logarithmic price chart, performance is measured
relative to its price at the start of the chart — hence
everything starts at 0.0% return on the left side and
goes from there.
On the chart to the right,
the first vertical interval above 0.0% is 41.4%. A 41.4%
gain at the first vertical interval grid line means our
total account value at this level is 1.414 times as
large as the starting value. We have the original unit
amount (1.0) plus the return (.414). Thus, if we started
with $1,000, we would now have $1,414.
Likewise, the next
interval up will be another 41.4% return, compounded on
top: $1,000 x 1.414 x 1.414 = $2,000, which is a 100%
return on the original amount. With another 41.4% return
we would have $2,000 x 1.414 = $2,828, which is $1,828
more than what we started with and a total return of
183% — and so on.
One nice feature of this is that a straight line
represents a constant percent return per year. For
example, if you drew a straight line along the crests of
the bumps of the yellow curve, it would have a slope
that takes approximately 11 years to raise 7 intervals
(.64 intervals per year), or roughly .64 x 41.4% =
26.5% per year.
As can be appreciated when viewing this chart, the
relative performance of the Strategy's performance
(plotted in yellow) can be compared to the S&P 500 index
(plotted in white) and each of the constituent funds. By
clicking one of the blue buttons in the lower right, the
logarithmic chart can be viewed in three different time
scales — 3-Years, 10-Years, and Max-Years (where Max is
the full number of years in the fund database for at
least two of the funds). If fewer than 10 years of data
is available, the 10-Year button will disappear.
•
Annualized Return Bar Chart
Below the logarithmic price chart is the annualized
return bar chart that compares the annualized return
(average yearly return) performance of the Strategy to
the S&P 500 Index over the most recent 3-Years,
10-Years, and Max-Years. The numerical value for
AlphaDroid's performance for each of those periods is
located below its corresponding vertical bar.
•
Sharpe Ratio Risk Measure
The Sharpe Ratio is commonly used in the
financial industry to measure an investment's added
return over that of a very safe money market fund
relative to the higher investment risk taken. It is
named for William Sharpe, Professor of Finance,
Emeritus, at Stanford University's Graduate School of
Business and the winner of the 1990 Nobel Memorial Prize
in Economic Sciences. The mathematical expression
for the Sharpe Ratio is:
Sharpe Ratio = (Fund Average Return - Money
Market Return) / (Fund Standard Deviation)
The Fund Average Return is calculated by first finding
the ratio of the ending value to the starting value of
the fund, finding its Nth root, and subtracting one —
where N is the number of years between the starting
value and the ending value. The average return for
Fidelity SPRXX over the same period (about 4.5%) is used
for the Money Market Return value.
Fund Average Return = (EndValue/StartValue)^(1/N) - 1
The Fund Standard Deviation is calculated by stepping
through the database day-by-day and calculating
gain/loss from one year earlier less the Average Annual
Return, squaring it and summing it to form a
TotalVariationSquared value. The TotalVariationSquared
is then divided by the total number of days. By taking
the square root of this value we get the Fund Standard
Deviation.
•
Sortino Ratio Risk Measure
The Sortino Ratio is commonly used in the
financial industry to measure an investment's added
return over that of a very safe money market fund
relative to the higher investment risk taken. The ratio
is named for Dr. Frank A. Sortino, an early popularizer
of downside risk optimization. The mathematical expression for
the Sortino Ratio is:
Sortino Ratio = (Fund Average Return - Money
Market Return) / (Downside Deviation)
The Fund Average Return is calculated by first finding
the ratio of the ending value to the starting value of
the fund, finding its Nth root, and subtracting one —
where N is the number of years between the starting
value and the ending value. The
Fidelity SPRXX money market fund is used as the riskless
reference return to beat.
Fund Average Return = (EndValue/StartValue)^(1/N) - 1
The Downside Deviation is calculated by stepping
through the database day-by-day and calculating
gain/loss from one month earlier relative to the monthly
return of the money market fund. If, and only if, the
monthly return is less than the money market return is
the difference in return (StrategyMonthlyReturn -
M.M.MonthlyReturn) squared and added to a TotalVariationSquared value. The TotalVariationSquared
is then divided by the total number of days. By taking
the square root of this value we get the Downside
Deviation.
•
Prudent, Suitable, and Relative Risk
As detailed in our white paper "Satisfying
the Prudent Man," strikingly absent from all regulatory documents
pertaining to financial advisors is (a) any practical definition of
risk and how it is quantitatively measured; (b) any
guidance for determining how much diversification is
required; and (c) any specification of the risk
categories (conservative, moderate, and aggressive)
financial professionals most commonly discuss.
Fortunately, the traditional risk-classification model portfolios
promoted by respected industry leaders can be
used to form a de facto consensus set of risk-ranked
portfolios (right) that can be modeled, quantified,
and used as reference standards in assessing the
relative risk performance of other portfolios.
In
field of
Behavioral Finance, the important
contribution by
Daniel Kahneman and
Amos Tversky in their seminal paper "Prospect
Theory" showed that for decisions involving risk
investors feel losses hurt more than gains feel good
(loss aversion). This lead to the development of
Post-Modern Portfolio Theory and the
Sortino Ratio, both of which
use downside deviation to measure of risk, as opposed to
using standard deviation.
Likewise,
AlphaDroid's Relative Risk (R.Risk) is calculated as the
ratio of downside deviations between a portfolio of
interest and the S&P 500 Index. The R.Risk value is
displayed on all AlphaDroid charts in the statistics
section (right) as well as on the Strategies Management
page. A portfolio with a 71% R.Risk would thus have a
downside deviation that is only 71% as large as the S&P
500 Index. The downside deviation is calculated using
quarterly returns measured daily across the entire time
span of the portfolio's equity curve. To ensure
consistency of the ratio, the same time span is used for
computing the downside deviation value of the S&P 500
Index. Downside deviation is calculated as the standard
deviation of all negative returns for all 90-day
intervals over the full time span. (Note: Prior to March
2021, R.Risk was calculated relative to a standard
financial industry aggressive portfolio. The change was
made because differences are minor and the revised
method is more easily explained.
•
Relative Risk Chart
In
the field of
Behavioral Finance, the seminal paper "Prospect
Theory" by
Daniel Kahneman and
Amos Tversky showed that "losses hurt more" than
"gains feel good" and leads to loss aversion behavior.
This discovery led to the development of
Post-Modern Portfolio Theory and the
Sortino Ratio, both of which
use downside deviation to measure risk, as opposed to
standard deviation.
Likewise, AlphaDroid's Relative Risk (R.Risk) is
calculated as the ratio of downside deviations between a
portfolio of interest and the S&P 500 Index. The R.Risk
value is displayed on all AlphaDroid charts in the
statistics section as well as on the Relative Risk chart
(right). A Strategy or Portfolio with a 71% R.Risk has a
downside deviation that is only 71% as large as the S&P
500 Index. The downside deviation is calculated using
quarterly returns measured daily across the entire time
span of the portfolio's equity curve. To ensure
consistency of the ratio, the same time span is used for
computing the downside deviation value of the S&P 500
Index. Please also see the
Prudent, Suitable, and Relative Risk section above.
In this example Strategy chart, the Reference S&P500
(white) has a R.Risk of 100% and 8% annualized return.
The Strategy (yellow) has a R.Risk of 30.8% (relative to
the S&P500) and a return of about 32%. The R.Risk and
return for each of the underlying funds is also plotted.
•
Relative Trend Strength
The Trend Strength is the final singular figure of merit
that
AlphaDroid generates and uses to determine which one,
and only one, of the funds has taken leadership and
should be owned. The green-bar trend chart is calibrated
in percent return per month and is an indicator of
possible returns next month — to the degree that the
current trend continues. Although "trend" means that
something in the recent past tells us something about
the near future, the future is also buffeted by the
random events of the world.
Trade Alert vs. Top Trend: It is
important to understand that just because a fund/stock
makes it to the top of the Trend Chart does not mean
that you should instantly run out and buy it. Each
Strategy also has a "Minimum Hold Time" rule, such as
"Trade Month-End," which determines when the Strategy
will actually employ the Trend information and possibly
generate an email Trade Alert. In the case of Trade
Month-End, only after the market close on the last
trading day of each month will the algorithm check the
Trend for each of the funds to determine if there
is a new leader, and if so, update the Sell/Buy
information for the Strategy and send an email Trade
Alert. It's not uncommon for one fund to be in the lead
mid-month, but another to take the lead near the end of
the month before the actual decision is made. Only with
the "Trade Any Day" setting will a new email Trade Alert
be sent on the exact day there is a new trend leader.
Reasons for selecting more restrictive settings include
early trade fees for some mutual funds, and that
generally, month-end trading actually does perform better
as
described here. You can edit the Strategy's
Minimum Hold Time parameter by clicking the
Information icon to the right of the Strategy name on
the Strategies Management page.
Inconsistent Trend Position:
It's not uncommon to see a pair of funds in one Strategy
have trend ranks become reversed when they are both also
in a second Strategy. The reason this is possible (and
rational) is that there is no perfect fixed definition
for "Trend" that is optimum for everything. One fund may
have a better one-week trend, but the other may have a
better one-month trend. Thus, positions can swap
depending on exactly how the trends are measured. Each
Strategy has a custom set of trend algorithm parameters
that are determined specifically for the set of funds in
the Strategy. If one or more of the funds change, it is
likely there will be at least a small variation in what
constitutes the optimum measure of trend for the
Strategy.
Strategy Editing: Further to the
point above, if you change something in a Strategy and
then reverse the change, there is no guarantee that the
original set of trend parameters will be used again.
Parameters are determined in full view of all past
market data. Thus, parameters set with data that is
current, versus data from one year ago, will likely be
a little different. A difference in how trend
is measure can result in a slightly different path of
fund ownership. Similarly, a change in the Minimum Hold
Time will also generally change the optimum parameters
for measuring the trend. There is more than one route to
your favorite restaurant, but the optimum route will depend on how traffic patterns change over
time, on roads that are added or deleted, and on whether traffic lights
get installed.
Unsubscribed Premium Strategy:
When you view an unsubscribed
Premium Strategy, such as this one
(click here), you will note the yellow text on
the relative strength bar chart that says "Unsubscribed
Strategy — 90-day-old trend data." If you are using a
Free Strategy, or you have a
paid subscription, then this message will not appear
and the green bar trends will be current. You may freely
evaluate any unsubscribed Premium Strategy and build and
evaluate your own Custom Strategies without paying a
subscription fee, but the green trend bar chart and the
Buy/Sell information will not be current.
• StormGuard
TM
Indicator
The
seven
StormGuard
icons shown in the figure to the right are
used on AlphaDroid charts to indicate the general
state of the market.
When
there is a market storm, AlphaDroid's
StormGuard
algorithm will override the normal selection of the best
fund in the Strategy to instead provide a trade signal
to move your funds to a safe money market fund or
Bear Market Strategy. This is
called
asset class
rotation. The StormGuard Indicator is located on the
right side of the title bar of the chart, as shown in
the figure to the right. It includes a numerical value
which appears to the left of the icon. When the
StormGuard Indicator value goes negative the Strategy
will produce a Trade Alert (according to the rules
below) to indicate that you should move to the safety of
a money market fund or
Bear Market Strategy.
(Note: The default setting is for StormGuard to use the generic
symbol
$CASH
in the Buy/Sell fields to mean "your favorite money market fund."
•
Japan: A Short Market Slap, or Economic Malaise?
•
Should You be Panic Selling on Bad News? No!
Please note that the StormGuard Indicator may be
slightly different from one Strategy to the next as can
be seen when viewing a few of the charts on the
Example Strategies page. This is because each
Strategy is separately evaluated to determine the amount
of storm protection required according the character of
its funds. For example, a Strategy composed of broadly
diversified funds will do best if it exits to $CASH as
soon as broad market averages start a protracted
decline, whereas other Strategies composed of sector
funds are likely to have one or more funds doing a bit
better than the broad market averages as the market
decline commences, and thus should be allowed a little
more running room before exiting.
StormGuard Versions: SG-Std, SG-AQR
and SG-Armor The standard version
of StormGuard is compliant with the
trade hold setting for your Strategy, including the
Trade Automatic setting which respects extended hold
requirements of certain mutual funds. StormGuard - AQR
(asymmetric quick response) is designed to "come out of
the hole" quicker following a major market selloff, and
does not respect the trade hold rules.
StormGuard-Armor is designed for
maximum safety and the ultimate in using multiple
factors to determine when to exit the market. Please
read more about these options at the
StormGuard-Options page to better
understand the features and benefits of each.
The "Faster Response" False Dilemma
is a common investment strategy fallacy leading to
hair-trigger "ants in the pants" when the markets look
scary, with an ever stronger desire for shorter time
constants to tighten up the response. The reason this is
a false dilemma is because shorter time constants do not
lead to better returns. There actually is an optimum
time constant, as described earlier, that balances
whipsaw losses from when one reacts too quickly, against
major decline losses from when one reacts too slowly.
Please consider this carefully as you review the meaning
of the white chart (that emerges) in the
Trade Signal Stationarity topic on the Sector
Rotation Theory page. The reason why month-end trading
generally performs better is documented in the
Hurst Exponent Fingerprint section of the Sector
Rotation Theory page. Additionally, if you have not yet
done so, please also read this pertinent article: Should
You be Panic Selling on Bad News? No!
•StormGuard
Integrated
Bear Market Strategies and Symbols
The default setting for StormGuard when a bear market
rages is to recommend moving to the safety of $CASH (any
money market fund). A major market crash can last more
than a year, as it did in both the 2001-02 and 2008-09
bear markets. By specifying something other than $CASH
for the Bear Market Symbol in StormGuard's advanced
options settings, you can do something more proactive
than simply hiding until the sun shines on the market
again. To access StormGuard's advanced settings, click
the
Information icon and the
button to show the StormGuard options, which include a
text box for entering a Bear Market Symbol. The default
setting is $CASH, which means that when StormGuard
triggers the BUY symbol will be "$CASH" (representing
your favorite money market fund). You can change the
Bear Market Symbol to anything you like, including (a) mutual funds, ETFs,
(b) special
extended history ticker symbols, (c) our
ready-made
Bear Market
Strategies ticker symbols, or (d)
the special ticker symbols used for the
Strategy-of-Strategies.
If you use a Strategy-of-Strategies special ticker
symbol, such as AD12, then your Strategy will import
the equity curve from your own AlphaDroid Strategy #12
as the bear market Strategy to use when StormGuard
triggers.
For example, setting the Bear Market Symbol to "UBT-"
means that instead of modeling the StormGuard period by
simply going to $CASH, it will instead model the period
using the extended history version of UBT, a 2x
leveraged long-term treasury ETF. Long-term treasury
funds are somewhat negatively correlated to the market
and will almost always make a worthy improvement to your
Strategy's performance, particularly when paired with
SG-AQR. Treasury funds vary considerably according to
the period of time their holdings are committed. Ten
variations are listed in the
extended history ticker symbols
section, which are provided to aid in Strategy
backtesting through artificially extending their history
to include one or both market crashes. Strategies
that are tamer do well with TLT-. Sector rotation
Strategies will likely do better with UBT- or TYD-.
More volatile stocks and leveraged ETF Strategies will
likely do best with TYD- or TMF-. Numerous ready-made
Bear Market
Strategies have been designed to span the
range of aggressiveness and address the problem of
hindsight selection bias that may cause us
to favor use of long-term treasuries based on their
recent negative correlation to stocks, even though
it has not always been the case.
•
Dual DefenseTM, TrendGuard
TM,
and Backstop Funds
Dual Defense
In the aftermath of the COVID-Crash, it became apparent that investors wanted to more safely navigate the policy-induced market perturbations
related to periodic pandemic lockdowns, inflationary money supply growth, painful interest rate hikes, and the devastation of bond markets.
The value of Warren Buffet’s Two Rules
for being doubly cautious about losing money became inspirational in the development of our
Dual Defense methodology.
View Dual Defense video here.
StormGuard +
TrendGuard When a bear market comes knocking (1)
StormGuard acts like a guard dog at the front door evaluating a set of 16 market
metrics to assess overall market safety while (2) TrendGuard acts like a second guard dog at the back door that employs a defensive Backstop fund
to directly compete for momentum leadership with the Strategy’s own candidate funds seeking to provide a performance floor in the event that all
of the candidate funds begin performing poorly separate from the broader market performance monitored by StormGuard.
Backstop Funds Originally, including Backstop fund, such as MDY, among a Strategy's set of 12 candidate funds was recommended so
that if none of the other candidate funds were doing better than the broad-market Mid Cap MDY fund, then MDY would be the one to own. For example,
a strategy containing only a variety of healthcare funds would have lackluster performance when healthcare is out of favor... unless the strategy
employs a broad Backstop (like MDY) to fill the gap. Better than investing in the best-performing healthcare fund would be to invest in the
best-performing healthcare fund that can beat MDY... and otherwise own MDY as the performance floor
backstop. Unfortunately, using a broad-market fund such as SPY or MDY as a Backstop carries with it unwelcomed baggage: they experience bear market
losses.
Seeking to eliminate this baggage, we’ve developed three proprietary Backstop funds (tickers TRM, BSTOP, and SSTOP) all of which are designed
to minimize bear market drawdowns. There are three of them because momentum algorithms generally perform better when their candidate funds are of
similar volatility because it aids orderly momentum-leadership handoff between the candidate funds and the Backstop fund. More details about
the design, character, and use of these Backstop funds can be found on the
Backstop Funds for Dual Defense page.
• Score,
CAGR, Alpha, Quarterly Wins and Beats
Score:
The Score value is found in the left portion of each
AlphaDroid chart in a statistics section (right). The
Score value combines three measures of Strategy
performance into a single value that slightly
overweights near-term returns and punishes for excess
risk in much the same manner as individuals evaluate
overall performance. The formula
includes the average return for all years, the average
return for the most recent three years, and the Risk Of
Loss value for the Strategy. Both long and short term
performance are important, and excess risk reduces
the Score. The exact equation is shown below.
Higher Scores are better.
Score
= (AllYearReturn + 3YearRetrn / 2) / (40% + RiskOfLoss)
Strategies constructed from general purpose diversified
funds typically produce Scores in the 45 to 55 range,
while a good selection of sector funds will produce a
Score in the 80 to 120 range. If a Strategy has only a
short history of about 5 years or less, or does not
include at least one major market crash during the life
of the Strategy, be cautious of
reading too much into the comparative value of the
Score.
CAGR:
CAGR is the
compound annual growth rate and is similar, but different from average return. For example, if a fund
earned 20%, -5%, and 35% in three consecutive years,
it's average return = (20% -5% +35%)/3 = 16.7%. However,
the total return of the fund is (1.2 x .95 x 1.35 -1) =
53.9%, but (1.167 x 1.167 x 1.167 -1) = 58.9%. Thus the
simply averaging the annual returns does not produce the
correct number in a compounding system. The CAGR
corrects that problem and is calculated as (Total Return
+ 1)^(1/yrs)-1. In this case the total return is 53.9%
and the period is three years, thus CAGR = (.593
+1)^(.3333)-1 = 15.455%.
Alpha:
Alpha is a risk-adjusted measure of the so-called
active return on an investment and is expressed as an
annualized return percentage that reflects the excess
performance over the index that would be predicted by
Beta alone. It is commonly used to assess
the performance of active fund managers. It is
because AlphaDroid both reduces volatility during
market crashes and has higher than usual returns that
AlphaDroid has quite excellent alpha measurements.
An asset has a Beta of
zero if its returns vary independently of changes in
the market's returns. A positive beta means that the
asset's returns generally follow the market's returns,
in the sense that they both tend to be above their
respective averages together, or both tend to be below
their respective averages together.
Beta is usually measured with respect to an index,
such as the S&P 500. A beta of 1.5 would mean that the
asset would have correlated price variations 1.5 times
greater than the S&P 500.
Alpha and Beta are respectively the vertical intercept
and slope of a 'least squares error' line passing
through a plotted set of points where the x coordinate
is the excess return of the index over an index fund
(usually S&P500) and the y coordinate is the excess
return of the fund over that index fund. They are
calculated as follows:
Beta = (n*Sxy -
Sx*Sy)/(n*Sxx - Sx*Sx)
Alpha = (Sy - Beta*Sx)/n
where S represents the sum of all x, y, x*x, or x*y
data over n samples.
Quarterly Wins and Beats:
Quarterly Wins is simply the percentage of 3-month
periods where the Strategy had a positive return.
Quarterly Beats is the percentage of 3-month periods
where the
Strategy beats the reference. Note that the value of
Quarterly Beats for a Strategy is generally about 55% to
68%. While this may seem quite low, it's because a Strategy
typically beats the S&P500 much more on the upside than
it loses to it on the downside. This is normal behavior.
• 2 Years Rolling
Returns
The
value of the rolling return chart is pretty obvious - it
make it quite clear that the Strategy's average returns
should not be expected every year. It also makes it
clear that over some periods the reference fund (usually
the S&P 500) will actually outperform the Strategy.
Trend following sector rotation algorithms do very well
when trends are long enough to both confidently confirm
and then ride. Occasionally the market has periods of
time where "punctuated events" quickly change the
direction of the market as natural disasters, technology
breakthroughs, and political events sometimes unfold in
a short period of time.
• 2 Years Rolling Drawdown
The 2-year rolling drawdown chart provides perspective
about the depth and duration of painful losses that can
be expected over time. Although there is no guarantee
that all future "punctuated events" will limit
themselves to the size of those of the past 20 years
charted here, the better your Strategy design does with
drawdowns in the past, the better it is likely do in the
future, making it quite useful for identifying problems
in during strategy design. Both the maximum and average
drawdown statistics (printed below the chart)
use the 2-year rolling drawdown method as the basis for
their calculations. In
the chart, the value plotted at any particular
date represents the maximum drawdown measured from a
starting point two years earlier through the two year
interval. The Strategy (yellow)
Max Drawdown plotted is 20%, whereas the reference
(white - usually the S&P500) Max Drawdown plotted is
55%. The average values plotted for them are 3.7% and
12% respectively.
• BornOn Date, Last Edit Date, Backtesting and FWPT
In
the statistics section on
the left side of AlphaDroid charts (right) are two
important dates: The Last Edit date
indicates when any material part of the Strategy's
definition (funds, trade rule, etc.) was last changed,
and the BornOn Date indicates the boundary date between
pure backtesting (used to tune the algorithms) and the
start of FWPT (Forward-Walk Progressive
Tuning). Thus AlphaDroid charts inherently show a
combination of optimized backtest performance and
forward-walk
performance through out-of-sample data. During
forward-walk, the Strategy is progressively re-tuned at
approximately six month intervals (indicated by the
yellow dots on the chart's horizontal axis) using only
fund data that precedes the re-tuning date.
The BornOn Date cannot be set for any less than five
years from the starting date of the Strategy to help
ensure it has suitable data for its initial tuning.
Ideally the backtesting period includes at least
one market crash and one bull market period to provide
the best opportunity for the algorithm to evaluate the
character both market types. In view of these
considerations, it is otherwise generally recommended to
push the BornOn Date back as far as possible to see if
the algorithm can walk forward in time through the
out-of-sample data in a reliable manner. Failure to walk
forward in time well generally does not mean that the
BornOn Date should be moved ahead. What it means is that
you have one or more candidate funds that does not
transfer leadership to other funds in an orderly manner.
Such funds often have a character including strong ramps
up followed by sharp drops. The cure is to eliminate
such funds because they do not play will with others. It
should additionally be understood that if the start date
of one or more funds occurs after the BornOn Date the
algorithm may perform sub-optimally for a period of time
while it adjusts to the new character of the Strategy
caused by the newly participating funds. Generally it is
advisable to specify a BornOn Date that occurs about a
year after the new funds start participating.
Please review other important details about
FWPT HERE.
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