MachineGhost's Research Resort

[MachineGhost]

This is a pretty tough standard. You've got to do both good in a bull and not too bad in a bear to make the list. It seems to me that if there was a sector that really outperformed in a year, it could threaten a broad-base approach or narrow sector pick approach and cause a portfolio to drop off the list. That probably happened to Investech even though it has the 2nd best risk/reward ratio (the first is a conservative utility portfolio with a 91.8 down market grade). It also seems clear to me that IQT is the best for stock picking. They use yield to determine value and quality to determine what to determine the value in to possibly buy. But how much is that getting a short-term boost from yield chasing behavior?

[MachineGhost]

[Kbg]

http://papers.ssrn.com/sol3/papers.cfm? ... id=2770897

Go to Tables 3 and 4 to get the bottom line. And here is the verbal generic findings

Our results suggest that the optimal risky portfolio is approximately 76% bonds, 8% gold, 7% emerging markets, 4% U.S. stock, 4% real estate, and 1% platinum. However, that is not a utility maximizing portfolio for any investor. Depending on an investor’s risk aversion level, the utility maximizing range of asset allocation is from 25-57% emerging markets, 0-38% bonds, 12-33% real estate, and 10-24% gold.

We also examine the robustness of these allocations to changing assumptions about the risk-free rate and find that the utility maximizing portfolio choice is unaltered.

What I find interesting is the prominence of gold in both the long only and the long\short optimal portfolios.

[Dieter]

http://papers.ssrn.com/sol3/papers.cfm? ... id=2770897

Go to Tables 3 and 4 to get the bottom line. And here is the verbal generic findings

Our results suggest that the optimal risky portfolio is approximately 76% bonds, 8% gold, 7% emerging markets, 4% U.S. stock, 4% real estate, and 1% platinum. However, that is not a utility maximizing portfolio for any investor. Depending on an investor’s risk aversion level, the utility maximizing range of asset allocation is from 25-57% emerging markets, 0-38% bonds, 12-33% real estate, and 10-24% gold.

We also examine the robustness of these allocations to changing assumptions about the risk-free rate and find that the utility maximizing portfolio choice is unaltered.

What I find interesting is the prominence of gold in both the long only and the long\short optimal portfolios.

Holy tracking error, batman!

Would have like inclusion of SCV, Intl Small, or LTT, but definitely interesting. Thanks for sharing.

No mention of tracking error, rebalancing, or future expected returns.

More specifics on allocations:

"
Investors with a risk aversion score of 1 (least risk averse) would prefer portfolio G which has a return of 13% and is comprised of 57.3% EM, 32.7% RE, and 10% gold. As the investors risk aversion level increases, the return on their utility maximizing portfolio decreases. Investors with a risk aversion score of 2 would select portfolio F which has a return of 12% and is comprised of 45.9% EM, 23.7% RE, and 30% gold. Investors with a risk aversion score of 3 would select portfolio E which has a return of 11% and is comprised of 37.5% EM, 8.4% bonds, 18.1% RE, and 36.1% gold. Finally, investors with a risk aversion score of 4 would select portfolio C which has a return of 9% and is comprised of 25.1% EM, 38.5% bonds, 12.3% RE, and 24.2% gold.
"

I suppose PPers would be in Risk Aversion Score of 4, which if split their Intermediate Bonds into LTT / Cash, would give something like (rounded numbers):

25% EM
12% REIT
24% Gold
14% LTT
25% Cash

Kinda sorta similar to GB re: ~40% in stocks plus Gold/LTT/Cash.... If go cash light, could turn into something like below to reduce tracking error with less tilt...:

20% SP 500
10% EM
10% REIT
25% Gold
25% LTT
10% Cash

[MachineGhost]

Despite its theoretical and practical importance, scientific guidance on making the optimal asset allocation decision is lacking.

You think??? I'm starting to really Feel The Browne lately.

I really wish these Ivory Tower academics would stop using Sharpe Ratio to find "optimal" portfolios. It's so flawed and not an apprporiate risk/reward metric. For instance, the numerator is linear while the denominator is hyperbolic. Anyway, the paper reads like what I do to create the Correlated Risk Parity PP. And they're using too short of a historical period so all they're doing is chasing recent returns which is the primary flaw with mean variance optimization. Ught.

As far as a risk aversion score goes, human biology has hardwired it to 2.5. In standard deviation calculations, the weighting used is 2. So the ideal would be a risk/reward metric that penalizes risk by 2.5 and fixes the many flaws of the Sharpe Ratio. I'm working on it, but counting forward from a fixed anchor bar in the past without referencing the date is proving tricky for me to implement in AmiBroker (which is array based). Sigh.

BTW, REIT's get kicked out of Financials and become their own Sector at the end of Oct or thereabouts. This should provide a tailwind as Wall Street rebalances.

Also, a cycle update for gold:



I'm holding off on any more purchases except for small potato DCA.

I'm pondering whether to try out Investment Quality Trends for my Blue Chip Outperformers portfolio. IQT discloses their screening criteria used for their Select Blue Chips but it looks nigh difficult to implement for free, especially tracking the high and lows of the dividend yields (which must also be adjusted for increases/decreases). I was working on a multi-factor screen in Excel several years ago, but the scraping was very problematic prone so I abandoned it. But there are clearly available factors to use for screening value, growth, quality, monopoly and eliteness at the individual stock level.

[Kbg]

If you are looking at individual stock screens I suggest checking out The Motley Fool Mechanical Investing board. Much corporate knowledge there but the learning curve is steep.

[MachineGhost]

If you are looking at individual stock screens I suggest checking out The Motley Fool Mechanical Investing board. Much corporate knowledge there but the learning curve is steep.

Been there, done that already. They're just exercises in curve fit futility and everyone abandons ship in every bear market. Unless it has substantially changed in the last few years?

In the newsletter ranks, NoLoad FundX rebalances every month (which is rather unusual) and the performance is still uninspiring. I'm pretty sure a simple trend following system on the S&P 500 beat literally all of those newsletters since 2000.

EDIT: Since 3/30/2000, 8.99% CAGR and -18.53% MaxDD using my enhanced trend following system. Buy and hold was 4.42% CAGR. Okay, so maybe not all of them... to beat that with superior stock picking skills alone is remarkable. So essentially, only 6 newsletters beats that and with less risk then the market index. Whether they have less MaxDD risk than my system is unknown but I deem it unlikely since stock picking newseltters don't typically engage in market timing.

I started tracking the newsletters primarily because I wanted to see if any of the market timers were worth their salt (Brinker and Investech) and lately I wanted to see if there's better stock picks available than The Oxford Club that does everything right, but the performance is unexciting for 15 years. Doing your own stock screens online doesn't have as long as a backtest period as would be needed to feel that the results are truly robust. IQT has been around for 50 years using the same strategy! I guess I'm sold. (And it doesn't escape notice that a Quality Value fund could essentially be the same thing).

Dualstow, you need to have a serious talk with your friend, my friend!

[MachineGhost]

I stumbled across this invaluable thread:

http://discuss.morningstar.com/NewSocia ... 70831.aspx

The risk/reward of the guy's portfolios is unbelievable.

[FF9000]

I stumbled across this invaluable thread:

http://discuss.morningstar.com/NewSocia ... 70831.aspx

The risk/reward of the guy's portfolios is unbelievable.

Fascinating, and he is strongly influenced by HB. Now I need to create a spreadsheet to backtest myself...

[MachineGhost]

For all those who wondered, below is my Prosperity allocation. It is a diversified mix of strategies, holding period lengths, risks and returns.

[MachineGhost]

Fascinating, and he is strongly influenced by HB. Now I need to create a spreadsheet to backtest myself...

I'm still trying to finish reading that thread but I definitely don't believe his numbers, so his backtesting skills are very suspect. However, it is possible he found the Holy Grail of combinations.

[Reub]

Some don't believe your numbers either!

[MachineGhost]

Some don't believe your numbers either!

<censored>

[InsuranceGuy]

[deleted]

[MachineGhost]

[MachineGhost]

I've been looking at starting a thread as I'm doing something similar but still tweaking it. Basically I've been looking at tuning a value threshold for stocks in a momentum framework to increase returns and then using MVO to reduce the drawdowns. I'm working out the formulas and parameters but the inital results look promising, still trying to apply a consistency measure to reduce trading.

Did you find that multi-market breadth crash protection algorithm of PAA to be any use over macro factors?

As a reminder:

FAA = returns, volatilities, correlations as ordinal rank
EAA = exponential scoring of above, going into cash on non-positive returns
PAA = dual momentum with multi-market breadth crash protection using separate risk on and risk off universes
GPM = simplified version of EAA using returns and correlations only ( r * (1 - c) )

[MachineGhost]

We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 14 years. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest three possible explanations for the declining momentum profits that involve uncovering of the anomaly by investors, decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.

http://papers.ssrn.com/sol3/papers.cfm? ... id=2791138

[InsuranceGuy]

[deleted]

[MachineGhost]

So I still have a lot to look at because my laptop is slowing me down relative to my still unavailable desktop. That said, PAA initially looked like a home run, but then going back there is considerable model risk in developing risk on/off parameters as more market information becomes available. FAA/EAA/other variants seem to work well if implemented properly. I've tried playing with various EAA iterations but minimum variance optimization while more computationally intensive seems to work better than using volatilities/correlations separately.

So it sounds like correlated volatility is definitely the way to go. I wonder why they didn't try that. Not trivial to calculate I suppose.

[bedraggled]

MG is fast approaching 10,000 posts.

Maybe a cheer or a gathering at the Research Resort to celebrate.

[Kbg]

MG is fast approaching 10,000 posts.

Maybe a cheer or a gathering at the Research Resort to celebrate.

Likely he will go over in the next hour or so.

[MachineGhost]

Not just yet, my friends!

I believe I may have finally found the Holy Grail in terms of getting minimally correlated factor exposure that beats RSP or other multi-fund hack approaches I've come up with:

In January 2014, ERI Scientific Beta began offering an innovative series of smart factor indices to investors: the Scientific Beta Diversified Multi-Strategy Factor Indices.

These diversified multi-strategy smart factor indices maximise the diversification of strategy-specific risks by using an equal-weighted mix of the most popular diversification strategies (Maximum Deconcentration, Maximum Decorrelation, Diversified Risk Weighted, Efficient Minimum Volatility and Efficient Maximum Sharpe Ratio) and as such provide performance that, over the long term, is on average 35% better than that of traditional factor indices.

Furthermore, all Scientific Beta diversified multi-strategy smart factor indices show positive excess returns compared to cap-weighted indices based on US long-term data (Dec 1975 to Dec 2015), notably High Value, with an annualised relative return of 4.01%, Mid Cap (3.98%), Mid Liquidity (3.69%), High Dividend Yield (3.04%), High Momentum (3.16%), Low Volatility (2.71%), Low Investment (3.57%) and High Profitability (2.85%).

Here's a factsheet: http://www.scientificbeta.com/download/ ... -Factsheet

And better yet, it costs only .35% a year in ETF form from http://www.globalxfunds.com/funds/sciu/

Yes, ironically, this is the same ETF I dissed previously from lack of understanding the apparent crazyness. It helps to read white papers instead of marketing fiction.

Now, the only downside this Smart Beta v2.0 approach has is it is going to underperform in bubble markets such as during the late 90's, so it will still need to be buffered with some amount of a high beta, high growth, etc. fund for completeness (if you want to minimize tracking error). I haven't seen a Smart Beta v2.0 for that yet.

[koekebakker]

Gotta love the name of the indices though: "Scientific Beta Diversified Multi-Strategy Factor Indices"

[MachineGhost]

Hip hip hooray! Resolve of Adaptive Asset Allocation fame (which combines everything but the kitchen sink: equal correlated volatility weighting, economic regime diversification, downside risk management via absolute momentum, possibly multi-factor exposure but I didn't see any examples) is now sub-advisor to the very first risk parity ETF in Canada on the Toronto Stock Exchange under the ticker HRA. This is the very first genuine, easily investable, potential PP killer!!!









For the same time period, the PP comes in at 7.46% CAGR and 14.18% MaxDD so we can see that dynamic asset allocation greatly improves the return and absolute momentum reduces the risk a bit and with a broader set of asset classes.

[Cortopassi]

Ticker here is HRA.TO. Other than US/CAD dollar risk, have you (or anyone) successfully held Canadian stocks? Can a US person simply buy it as HRA.TO?

This is interesting.