TACTICAL ASSET CLASS ROTATION MODEL DARIUS DALE: MACRO TEAM JANUARY 15, 2015
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INTRODUCING TACRM 1 WHAT IS TACRM? TACRM is a quantitative model designed to systematically measure momentum across a variety of asset classes in order to transform those signals into actionable investment themes. 2 3 HOW DOES TACRM WORK? First, TACRM generates a normalized view of price momentum for every liquid market in the world. That momentum score is derived from a multi-factor, multi-duration approach and hencesoforth referred to as a Volatility-Adjusted Multi-Duration Momentum Indicator, or VAMDMI for short. Recall that our VAMDMI metric is simply the arithmetic mean of three independent z-scores of volume-weighted average price data, in which the three sample sizes (i.e. short-term, intermediate-term and long-term) accordion inversely to the trend in global financial market volatility. The metric is designed to standardize recorded momentum across securities and asset classes with variant betas, effectively normalizing the degree to which marginal investors might have a propensity to buy or sell a given market. WHY IS TACRM VALUABLE FOR INVESTORS? By systematically analyzing these composite momentum scores, TACRM is able to produce actionable risk management signals. TACRM s black-and-white quantitative signals remove the subjectivity from handicapping global macro risk(s), effectively providing investors with an unparalleled degree of market color that allows for unmatched decision-making in the tactical asset allocation process. TACRM provides global capital allocators the kind of consistent and actionable BUY/SELL signals needed to formulate or alter any investment mosaic. HEDGEYE 3
SUMMARY INVESTMENT CONCLUSIONS HEDGEYE 4
QUANTIFY: MOMENTUM y-axis: Delta from Trailing 3M Average TACRM GLOBAL MACRO MOMENTUM MONITOR Current Volatility-Adjusted Multi-Duration Momentum Indicator Score 2.0x MUB = VXX = 1.6x EPHE 2.3x LQD = 2.1x = 2.2x 1.5x TIP ICN GDX = 0.9x 0.8x = BND 0.7x = 2.1x FXY = 0.2x NIB = 0.5x BZF = 0.1x SHY = 1.5x GLD = 0.9x AGG = 2x SLV = 0.5x 1.0x AYT EWY = -0.1x ALD = -0.3x = 0x RWX FLAT = 0.8x = 2x JO = 0x TLT 2.1x SGG = -0.4x WIP = -0.5x EMLC = -0.6x EDV ZROZ = 2.1x = 2.1x TUR = 1.1x EGPT = EWZ -0.5x = 0.5x -0.7x EWH EWSS EIS = -1x = -0.7x GAF BWX = 0.3x = -0.1x = -0.8x BNDX = 2x EMB AAXJ = -0.5x IHY JNK = -0.9x -0.6x IYR VNQ ENZL = 1.9x = 2x CEW = 0.5x EWAS = USO RSX 0x = -1x UGA = -1.1x FXA -1.4x -1.2x FXI CCX = -0.8x = 1.1x = -1.1x EEM ICOL = CYB -0.7x = -1.3x = 0.1x GUR = = -1.4x UNG -1.1x = -0.7x BWZ = -1.2x EWW ECNS EMCB = -1x = -0.5x = -1.4x EWHS ENOR BNO = -1.6x UUP EPOL -0.9x SMIN 1.4x DBC -1.1x = 0.9x GML = -1.3x NGE EWM = -1.6x = -1.4x PGAL = -1.2x XOP = FXB -1.2x = -1.3x = -1.3x FXS = -1.5x BKLN = -0.8x CHIQ = -1.1x EZA = -0.3x 0.0x VNM = -1.3x IBB = IHE 1.2x = 1.3x -2.5x -2.0x -1.5x -1.0x IEZ -0.5x -1.5x EPI CAF = = 0x PFF 0.9x 0x CHIX 0.0x = 1.1x 0.5x 1.0x 1.5x 2.0x GMF = -0.5x EWA EWZS FILL -1.3x = -1.5x -1.6x IBND = -1.5x FXE = -1.6x ITB = 0.8x FXC = -1.8x FXF = -1.6x EWCS XLE = = -1.6x XLU = 1.1x EU = -1.6x -1.5x EWG = -0.7x PICK = -1.9x RLY = -1.6x EWI XLV = -1.6x 0.7x EWL -0.5x = -0.8x EWGS = -0.6x JJN = -1.5x EWQ EWK = -0.8x ITA = 0.4x THD = EWP = -1.7x EIRL -1.3x IWO = -0.7x = 0.3x CQQQ -1.1x = -1.1x EWC = -1.8x EWS WDTI = -1.6x 0x EDEN EWU = -1.3x = BAL -1.6x EZU XRT = IHI -1.5x EWN -1.3x = IWM = 0.5x 0.8x STPP VEGI -1x = = -0.9x -0.1x EWT = ARGT -1.4x = DBA -1.6x EWJ = -1.9x = EUFN -1.3x ECH = -1.9x AMLP = -1.8x = -1.9x XLP = -1.7x IWN EWO = 0.6x = -0.5x = -1.6x FOIL -1.6x PALL EIDO = -1.2x -1.3x IWS USMV EFNL EWUS = -0.3x = 0.4x EPU = -2.2x = -1.5x = -1.6x -1.0x QMN MTUM IWR = -1.5x = XTL -0.1x -0.4x = -0.6x DBB = -2.3x JJC XLB QEH = = -2.4x -1.4x QAI = -1.4x = -1.2x SOYB = -1.1x IWP = -0.5x COW = -1.9x EWD = -1.8x FPX -0.7x IWB DIA = -0.5x CORN = -0.9x DXJS = -1.3x IWD IWF SMH IWV IUSV IUSG = -0.6x = -0.5x XLY = -0.4x XLK = -0.7x -0.8x -0.7x = -0.8x -0.5x SPY = -0.7x WEAT = -1.1x -1.5x DXJ QQQ = -1.3x OEF = VLUE -0.8x = -0.9x XLI = -0.8x = -1x IYT = -0.9x IAI = -0.9x XLF = -1.1x -2.0x KIE KRE = -1.3x = -1.8x -2.5x x-axis: Delta from Trailing 6M Average Across the spectrum of primary asset classes (i.e. fixed income, equities, currencies, commodities, cash and volatility), TACRM systematically quantifies the momentum embedded in each of the individual exposures comprising each asset class. Rather than rely on simple or exponential moving averages, we employ a multi-factor, multi-duration approach to quantifying momentum that we have found to be statistically more robust. HEDGEYE 5
QUANTIFY: MOMENTUM (CONTD.) HEDGEYE 6
QUANTIFY: EXTREME MOMENTUM (JJC) ipath Exchange Traded Notes Dow Jones-AIG Copper Total Return Sub-Index (DBB) PowerShares DB Base Metals Fund (EPU) ishares MSCI All Peru Capped ETF (COW) ipath Dow Jones-UBS Livestock Total Return Sub-Index ETN (STPP) ipath US Treasury Steepener ETN (DBA) PowerShares DB Agriculture Fund (PICK) ishares MSCI Global Metals & Mining Producers ETF (ECH) ishares MSCI Chile Capped ETF (AMLP) Alerian MLP ETF (EWD) ishares MSCI Sweden ETF (KRE) SPDR S&P Regional Banking ETF (FXC) CurrencyShares Canadian Dollar Trust (EWC) ishares MSCI Canada ETF (EUFN) ishares MSCI Europe Financials ETF (EWP) ishares MSCI Spain Capped ETF (EWU) ishares MSCI United Kingdom ETF (EWCS) ishares MSCI Canada Small-Cap ETF (EU) WisdomTree Euro Debt Fund (EWO) ishares MSCI Austria Capped ETF (EWZS) ishares MSCI Brazil Small-Cap ETF (FXI) ishares China Large-Cap ETF (XLU) Utilities Select Sector SPDR Fund (TUR) ishares MSCI Turkey ETF (IBB) ishares Nasdaq Biotechnology ETF (IHE) ishares U.S. Pharmaceuticals ETF (UUP) PowerShares DB US Dollar Index Bullish Fund (SHY) ishares 1-3 Year Treasury Bond ETF (VXX) ipath S&P 500 VIX Short-Term Futures ETN (IYR) ishares US Real Estate ETF (VNQ) Vanguard REIT ETF (BNDX) Vangaurd Total International Bond Market ETF (FLAT) ipath US Treasury Flattener ETN (AGG) ishares Core US Aggregate Bond ETF (EDV) Vanguard Extended Duration Treasury ETF (LQD) ishares iboxx $ Investment Grade Corporate Bond ETF (TLT) ishares 20+ Year Treasury Bond ETF (BND) Vangaurd Total US Bond Market ETF (ZROZ) PIMCO 25+ Year Zero Coupon US Treasury Bond ETF (EPHE) ishares MSCI Philippines ETF (MUB) ishares National AMT-Free Muni Bond ETF Extreme Momentum (Top-20 and Bottom-20 VAMDMI Readings) -2.4x -2.3x -2.2x -1.9x -1.9x -1.9x -1.9x -1.9x -1.8x -1.8x -1.8x -1.8x -1.8x -1.7x -1.7x -1.6x -1.6x -1.6x -1.6x -1.6x 1.1x 1.1x 1.1x 1.2x 1.3x 1.4x 1.5x 1.6x 1.9x 2.0x 2.0x 2.0x 2.0x 2.1x 2.1x 2.1x 2.1x 2.1x 2.2x 2.3x -3.0x -2.0x -1.0x 0.0x 1.0x 2.0x 3.0x Quantifying extremes in momentum at the secondary asset class level can help investors front-run major rotations in flows at the primary asset class level. Akin to a sand pyramid, it is impossible to know on a prospective basis which incremental grain of sand will be responsible for collapsing the pyramid, but we as investors have a duty to consistently identify and take advantage of the stresses in the chaotic system that is the global financial marketplace. HEDGEYE 7
y-axis: Delta from Trailing 3M Average QUANTIFY: ASSET CLASS ROTATIONS TACRM ASSET CLASS ROTATION MONITOR DM Equities = 23% 10% Cash = 35% Fixed Income & Yield Chasing 0% = 22% -150% -100% Commodities -50% = 8% 0% 50% 100% 150% 200% Foreign Exchange = 1% Passive Trend Follower Asset Allocation 20% -10% -20% EM Equities = 11% -30% -40% -50% x-axis: Delta from TTM Average By calculating the spread between individual VAMDMI readings greater than +1x and readings less than -1x within each of the primary asset classes and subsequently normalizing these spreads to a 100pt. scale, TACRM can then dynamically generate estimates for how much passive investors are over/under exposed to a particular primary asset class according to the relative levels of momentum embedded within each asset class. Any deviation from trend in these weightings can be said to represent the presence of rotation-based capital flows. HEDGEYE 8
y-axis: Current Passive Trend Follower Asset Allocation on a Percentile Basis (1Y) QUANTIFY: ASSET CLASS ROTATIONS TACRM ASSET CLASS ROTATION MONITOR Passive Trend Follower Asset Allocation 110% 105% 100% 95% Cash = 35% 90% 85% 80% 75% 70% 65% 60% DM Equities = 23% 55% 50% 45% 40% 35% Fixed Income & Yield 30% Chasing = 22% Commodities = 8% 25% EM Equities = 11% 20% 15% 10% 5% Foreign 0% Exchange = 1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% x-axis: Current Passive Trend Follower Asset Allocation on a Percentile Basis (5Y) By calculating the spread between individual VAMDMI readings greater than +1x and readings less than -1x within each of the primary asset classes and subsequently normalizing these spreads to a 100pt. scale, TACRM can then dynamically generate estimates for how much passive investors are over/under exposed to a particular primary asset class according to the relative levels of momentum embedded within each asset class. Any deviation from trend in these weightings can be said to represent the presence of rotation-based capital flows. HEDGEYE 9
QUANTIFY: STYLE FACTOR MOMENTUM U.S. Equity Style Factor VAMDMI Ranker (AMLP) Alerian MLP ETF (KRE) SPDR S&P Regional Banking ETF (XLE) Energy Select Sector SPDR Fund (IEZ) ishares U.S. Oil Equipment & Services ETF (XLB) Materials Select Sector SPDR Fund (KIE) SPDR Insurance ETF (XOP) SPDR S&P Oil & Gas Exploration & Production ETF (XLF) Financial Select Sector SPDR Fund (VLUE) ishares MSCI USA Value Factor ETF (OEF) ishares S&P 100 ETF (IYT) ishares Transportation Average ETF (IAI) ishares U.S. Broker-Dealers ETF (XLI) Industrial Select Sector SPDR Fund (QQQ) PowerShares NASDAQ Trust (ETF) (IWD) ishares Russell 1000 Value ETF (IUSV) ishares Russell 3000 Value ETF (SPY) SPDR S&P 500 ETF Trust (FPX) First Trust U.S. IPO Index Fund (IWB) ishares Russell 1000 ETF (IWV) ishares Russell 3000 ETF (XLK) Technology Select Sector SPDR Fund (XTL) SPDR S&P Telecom ETF (IWF) ishares Russell 1000 Growth ETF (IUSG) ishares Russell 3000 Growth ETF (SMH) Market Vectors Semiconductor ETF (IWP) ishares Russell Mid-Cap Growth ETF (IWN) ishares Russell 2000 Value ETF (DIA) SPDR Dow Jones Industrial Average ETF Trust (IWR) ishares Russell Mid-Cap ETF (XLY) Consumer Discretionary Select Sector SPDR Fund (IWS) ishares Russell Mid-Cap Value ETF (MTUM) ishares MSCI USA Momentum Factor ETF (IWM) ishares Russell 2000 ETF (PFF) ishares US Preferred Stock ETF (IWO) ishares Russell 2000 Growth ETF (ITA) ishares U.S. Aerospace & Defense ETF (USMV) ishares MSCI USA Minimum Volatility ETF (XRT) SPDR Retail ETF (XLP) Consumer Staples Select Sector SPDR Fund (GDX) Market Vectors Gold Miners ETF (XLV) Health Care Select Sector SPDR Fund (IHI) ishares U.S. Medical Devices ETF (ITB) ishares U.S. Home Construction ETF (XLU) Utilities Select Sector SPDR Fund (IBB) ishares Nasdaq Biotechnology ETF (IHE) ishares U.S. Pharmaceuticals ETF (VNQ) Vanguard REIT ETF -1.84x -1.81x -1.51x -1.48x -1.42x -1.32x -1.24x -1.06x -0.99x -0.89x -0.88x -0.88x -0.81x -0.81x -0.78x -0.76x -0.73x -0.71x -0.69x -0.68x -0.65x -0.64x -0.59x -0.54x -0.53x -0.50x -0.49x -0.48x -0.38x -0.38x -0.32x -0.09x -0.05x -0.02x 0.26x 0.38x 0.40x 0.50x 0.55x 0.68x 0.70x 0.77x 0.83x 1.11x 1.22x 1.27x -2.50x -2.00x -1.50x -1.00x -0.50x 0.00x 0.50x 1.00x 1.50x 2.00x 2.50x 1.96x Observing trends in momentum within the U.S. equity market can help investors front-run major shifts in performance at the style factor level. Knowing which sectors and style factors to over/underweight is yet another way TACRM helps investors beat index beta. HEDGEYE 10
9 8 7 6 5 4 3 2 1 0 FORECAST MARKET BETA IN FIXED INCOME & YIELD CHASING INSTRUMENTS?: CHECK TACRM Investment Recommendation: INCREASE Exposure to Fixed Income & Yield Chasing TACRM Investment Recommendation: DECREASE Exposure to Fixed Income & Yield Chasing Barclays Aggregate Bond Index (rhs) 113 111 109 107 105 103 101 99 97 95 HEDGEYE 11
FORECAST MARKET BETA IN DEVELOPED MARKET EQUITIES?: CHECK 9 8 7 6 5 4 3 2 1 0 TACRM Investment Recommendation: INCREASE Exposure to DM Equities TACRM Investment Recommendation: DECREASE Exposure to DM Equities MSCI World Index (rhs) 1,800 1,600 1,400 1,200 1,000 800 600 HEDGEYE 12
FORECAST MARKET BETA IN EMERGING MARKET EQUITIES?: CHECK 9 8 7 6 5 4 3 2 1 0 TACRM Investment Recommendation: INCREASE Exposure to EM Equities TACRM Investment Recommendation: DECREASE Exposure to EM Equities MSCI Emerging Markets Index (rhs) 1,250 1,150 1,050 950 850 750 650 550 450 HEDGEYE 13
9 8 7 6 5 4 3 2 1 0 FORECAST MARKET BETA IN FOREIGN EXCHANGE?: CHECK TACRM Investment Recommendation: INCREASE Exposure to Foreign Exchange TACRM Investment Recommendation: DECREASE Exposure to Foreign Exchange PowerShares-DB US Dollar Index Bearish Fund (rhs) 30 29 28 27 26 25 24 23 HEDGEYE 14
FORECAST MARKET BETA IN COMMODITIES?: CHECK 9 8 7 6 5 4 3 2 1 0 TACRM Investment Recommendation: INCREASE Exposure to Commodities TACRM Investment Recommendation: DECREASE Exposure to Commodities CRB Index (rhs) 480 430 380 330 280 230 180 HEDGEYE 15
FORECAST MARKET BETA IN CA$H?: CHECK 9 TACRM Investment Recommendation: INCREASE Exposure to Cash CBOE S&P 500 Volatility Index (VIX) TACRM Investment Recommendation: DECREASE Exposure to Cash 80 8 70 7 6 60 5 50 4 40 3 2 30 1 20 0 10 HEDGEYE 16
For more information contact: DDALE@HEDGEYE.COM 203.562.6500