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The Clear Alternative CE Quantitative Models – Exploring the Application of Counter-Trend Strategies For Investment Professional Use Only.

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Presentation on theme: "The Clear Alternative CE Quantitative Models – Exploring the Application of Counter-Trend Strategies For Investment Professional Use Only."— Presentation transcript:

1 The Clear Alternative CE Quantitative Models – Exploring the Application of Counter-Trend Strategies For Investment Professional Use Only

2 Agenda  Defining Counter-Trend models  How Counter-Trend works  Discover market environment factors that influence performance  Exploring the environments that are most effective for Counter-Trend (and least)  Application to Managed Futures For Investment Professional Use Only2

3 Trend Following For Investment Professional Use Only3

4 Trend Following  Trend Definition – In general, a trend following system aims to invest in the direction of the trend  Most often describe moving average crossover  Short term, medium term, and/or long term For Investment Professional Use Only4

5 Trend Following Characteristics  Reactionary  Hit Ratio – 25% - 40%  Can give back gains at turning points (Whipsaw)  Performs well in long trends For Investment Professional Use Only5

6 Trend Following  Crossover Model Example – 30/120 day moving average  If 30 day moving average is HIGHER than 120 day moving average, then model would take a long position For Investment Professional Use Only 6

7 Trend Following For Investment Professional Use Only7 Short Long Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index.

8 Counter-Trend For Investment Professional Use Only 8

9 Counter-Trend (Cont.)  Definition – Majority of models are looking to sell over bought levels and buy oversold  Mean Reversion  Shorter Term For Investment Professional Use Only 9

10 Counter-Trend (Cont.) Characteristics  Reactionary  Hit Ratio – 55% - 70%  Gains come at inflection points  Performs well in choppy, “noisy” markets For Investment Professional Use Only10

11 Counter-Trend (Cont.)  Crossover Model Example – 10/30 day moving average  If 10 day moving average is HIGHER than 30 day moving average, then model would take a short position For Investment Professional Use Only 11

12 How Counter-Trend Works Case Study For Investment Professional Use Only12

13 Case Study Simple Case Study Rules (Cont.)  Two Models Examined  Simple Trend (Momentum) Model  Buy (Long Exposure) after a ten day high is realized  Sell (Short Exposure) after ten day low is realized  Simple Counter-Trend Model  Buy (Long Exposure) after a ten day low is realized  Sell (Short Exposure) after a ten day high is realized  Holding periods are fixed for both Models For Investment Professional Use Only 13

14 Case Study Simple Case Study Rules  S&P 500 January 1, 1990 to December 31, 2011  5547 Trading Days  S&P had a total return of % For Investment Professional Use Only14 Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index.

15 Case Study For Investment Professional Use Only15 Table 1: Short Term Momentum Model v. Short Term Counter-Trend Model on the S&P 500 from 1/1/1990 to 12/31/2011 Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index.

16 Case Study For Investment Professional Use Only16 Table 2: Annual Performance Summary of 10 Day Counter-Trend Model with 1 Day Holding Period from 1/1/1990 to 12/31/2011 Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index.

17 Market Environment Factors For Investment Professional Use Only 17

18 Volatility and Noise 18 Series 1 – Volatility 21% Series 2 – Volatility 16% For Investment Professional Use Only

19 What is Noise? 19 For Investment Professional Use Only

20 What is Noise? – Numerical Example 20 Day 1Day 2Day 3Day 4Day 5Day 6Day 7Day 8Day 9Day %.5%1.0%-1.0%1.0%-1.0%1.0%-2.0%.5% For Investment Professional Use Only

21 Exploring Environments For Investment Professional Use Only 21

22 What Characterizes a “Noisy” Market? Noisy Market profile:  Market participants have differing opinions  Market participants must be able to “vote” or express their opinion  Barriers to entry: low  Cost of Trade  Speed of Trades  Free from centralized control  Liquidity 22 For Investment Professional Use Only

23 The Data  Two sets of data explore the presence of “Noise”  1926 – 1996  1997 – 2013  Data from 1997 – 2013 used for environment expectations  Structural changes in market beginning in 1997  All projections are subject to change if adverse structural market changes exist 23 For Investment Professional Use Only

24 Why look at data starting in 1997? Key structural changes:  September 9, The E-mini S&P 500 Futures Contract was introduced by the Chicago Mercantile Exchange, greatly increasing the liquidity and activity of equities futures trading.  Dollar volume increased 8.5x the 5 years proceeding September of 1997 compared to the 5 years preceding the advent of the E-mini contracts  1997 to In concert with the dot-com bubble, online trading and day trading became exponentially more popular.  August Regulation Fair Disclosure was put into effect by the U.S. Securities and Exchange Commission, all but eliminating the legal information edge of large institutional investors over others. This regulation increased trading smaller money management firms.  April 9, Conversion to decimalization for U.S. equities was completed, which significantly reduced trading costs and increased the liquidity of many stocks because of tighter bid/ask spreads. 24 For Investment Professional Use Only

25 Monthly “Noise”  1926 – 1996 was 73.63%  1997 – 2013 was 78.62%  The majority of the observed months showed “Noise” ranging between 60% - 90%  Further – a two sample test of the two time frames’ average noise yielded a t-statistic of 3.54 at the 99.96% confidence level 25 For Investment Professional Use Only

26 Volatility and Noise Quadrants  Quadrant 1: Low Volatility & Low Noise (Q1: LVLN)  Quadrant 2: High Volatility & Low Noise (Q2: HVLN)  Quadrant 3: Low Volatility & High Noise (Q3: LVHN)  Quadrant 4: High Volatility & High Noise (Q4: HVHN) 26 For Investment Professional Use Only

27 Volatility and Noise Quadrants 27 Volatility Low: <20%High: >=20% Noise Low: <80%Q1: LVLNQ2: HVLN High: >=80%Q3: LVHNQ4: HVHN For Investment Professional Use Only

28 Volatility and Noise Quadrants Percentage of Time Spent Volatility LowHighTotal Noise Low48.43%8.94%57.37% High34.90%7.73%42.63% Total83.33%16.67% For Investment Professional Use Only

29 Volatility and Noise Quadrants Percentage of Time Spent Volatility LowHighTotal Noise Low37.75%9.80%47.55% High36.27%16.18%52.45% Total74.02%25.98% For Investment Professional Use Only

30 Volatility and Noise Quadrants For Investment Professional Use Only

31 S&P Performance by Quadrant Statistic Q1: LVLNQ2: HVLNQ3: LVHNQ4: HVHN Environmental Avg. Noise 64.56%71.51%90.12%89.99% Avg. Volatility 12.88%28.81%13.89%32.26% Performance Avg. Monthly Return 2.28%-1.17%0.25%-1.39% Std. Dev. of Monthly Returns 4.44%8.76%1.57%4.91% Annualized Return Expectation 31.11%-13.20%3.06%-15.49% Max Monthly Return 8.92%10.93%4.00%8.76% Min Monthly Return -9.12%-14.46%-3.10%-16.79% % of Positive Months 76.62%45.00%63.51%39.39% Duration # of Months Avg. Consecutive Months Max Consecutive Months For Investment Professional Use Only

32 Predictability of Noise Probability of transitionFrom Q1From Q2From Q3From Q4 To Q1: LVLN 42.11%20.00%43.24%24.24% To Q2: HVLN 2.63%25.00%6.76%24.24% To Q3: LVHN 40.79%20.00%44.59%18.18% To Q4: HVHN 14.47%35.00%5.41%33.33% Monthly AutocorrelationsVolatilityNoise %-11.11% %-14.69% For Investment Professional Use Only

33 Simple Counter-Trend Performance Quadrant: Statistic Q1: LVLNQ2: HVLNQ3: LVHNQ4: HVHN Avg. S&P 500 Monthly Return 2.28%-1.17%0.25%-1.39% Avg. STCTS Monthly Return -0.10%-0.49%1.19%2.55% Std. Dev. of Monthly Returns 1.99%4.16%1.48%4.88% Annualized Return Expectation -1.16%-5.77%15.32%35.21% Max Monthly Return 5.62%4.99%4.52%15.84% Min Monthly Return -4.38%-8.97%-2.05%-9.08% % of Positive Months 49.35%50.00%75.68%75.76% % of Time Spent in Quadrant 37.11%9.80%36.27%16.18% For Investment Professional Use Only

34 Application to Managed Futures For Investment Professional Use Only 34

35 Application to Managed Futures  These trading models can be implemented through multiple different vehicles including:  Stocks  ETF’s  Mutual Funds  Futures are the vehicle of choice for several reasons:  Liquidity  Cost  Tax treatment  Trend Models have struggled 35 For Investment Professional Use Only

36 Summary  Defining Counter-Trend models  How Counter-Trend works  Discover market environment factors that influence performance  Exploring the environments that are most effective for Counter-Trend (and least)  Application to Managed Futures For Investment Professional Use Only36

37 Risks  There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate, and you may have a gain or loss when you redeem shares.  Exposure to the commodities markets may subject a fund to greater volatility than investing in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as natural disasters and international economic, political and regulatory developments.  Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things, increased volatility and transaction costs or a fund to lose more than the amount invested.  Investing in Exchange-Traded Funds (ETFs) will subject a fund to substantially the same risks as those associated with the direct ownership of the securities or other property held by the ETFs.  Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio.  Futures contracts involve additional investment risks and transaction costs, and create leverage, which can increase the risk and volatility of a fund.  Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as mutual funds which focus on alternative strategies are not suitable for all investors.  Diversification does not assure profit or protect against risk. For Investment Professional Use Only37

38 Definition of Indexes  The S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.  The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the investable U.S. equity market.  The NASDAQ 100 measures the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies.  The NIKKEI 225 measures the largest 225 stocks of the Tokyo Stock Exchange. The index is a simple average, unweighted.  The Euro Stoxx 50 Index provides a Blue-chip representation of supersector leaders in the Eurozone. Covers Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. One cannot directly invest in an index. For Investment Professional Use Only38

39 CE Credit You will receive an from 361 Capital following this presentation. If you are a CFP and would like to receive CE credit for your attendance, please respond to that . If you have other designations with which you would like to receive CE credit, you will be responsible for requesting the credit. For Investment Professional Use Only 39

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