The close of 2012 marks the end of our first calendar year. Although the “Diversified Active ETF Blend” portfolio was only traded for nine months, it is as good a demarcation as any for our first on-line performance report. This moderate-risk strategy is 3/4 invested in a diversified tactical trend-following model, and 1/4 invested in a more active, long-short mean reversion model.
A review of the HFRX hedge fund tracking website suggests an average full 2012 performance of +2.5% to +3.5%. Not a terrific year for alternative strategies! However, ECA’s verifiable performance matched the hedge fund experience over just nine months, also surpassing its 60%-Stock/40%-Bond passive benchmark by about +1.35% after fees.
Most importantly, this return on capital was accomplished with only a fraction of benchmark component risk, as graphically presented below from our custodian, Interactive Brokers, LLC:
In fact, the Sharpe ratio (returns per unit of risk) of this, our first tracked strategy, was about double that of the S&P 500. Note, in particular, how the equity curve dynamically migrates towards the outperforming benchmark component, whether stocks or bonds, according to the prevailing risk-reward environment.
The truth is that the year didn’t offer quantitative systems much in terms of a consistent market regime to latch onto. While the first quarter was almost a straight upward path, providing the vast majority of strong annual index gains, the last three quarters were largely a volatile sideways experience.
All in all, I’m very pleased with our risk-reward profile, and look forward to adding additional program strategies over the course of 2013 suited to other investing goals. At the end of the day, our overarching objective is to engineer equity-like returns while enjoying the relative (historical) safety of bonds. So far, so good!
* Investing is risky and past performance, whether actual or tested, is no guarantee of future results or profitability.
