TACTICAL ASSET CLASS ROTATION MODEL DARIUS DALE: MACRO TEAM FEBRUARY 2, 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 TACRM GLOBAL MACRO MOMENTUM MONITOR y-axis: Delta from Trailing 3M Average Current Volatility-Adjusted Multi-Duration Momentum Indicator Score 2.0x TIP = 1.6x 1.5x VXX = 1.6x ICN = 0.8x SHY = UGA 1.5x = -0.3x FXY EMB = 0.2x JNK = 0x LQD = 1.9x FXF = 0.2x 1.0x = 0.5x GDX = 0.9x GLD = 1.2x EGPT = 0x BNO = -0.7x EWSS = -0.2x USO = -0.9x PFF = BND 1.1x = 1.8x EWD = 0.4x EWHS EWH XOP = = 0.7x -0.3x = EWI -0.4x MUB ENOR EPHE = AGG 1.6x DBC -0.2x -0.9x EMCB = -1x = -0.4x = 1.5x 1.7x EFNL = EWK 0.4x SLV = 0.7x 0.5x EPOL = -0.8x EZA = 0.4x BKLN = -0.3x = 0.4x ICOL CHIQ GAF = = -0.9x -0.5x = EWJ 0x JJN = = 0.1x -0.2x SGG = -0.5x WDTI = 1.3x EDEN BAL = -0.4x -0.2x EWQ = -0.1x EWG = 0.5x EWM EWGS = 0.6x DBB = -1.1x EWAS = IEZ -0.9x PGAL EWU -0.8x = -0.4x -1x EZU = -0.1x EWA PICK = -1x = -1.2x FILL QEH -1.1x NGE RSX EPI = -1x 0.1x EMLC 0.7x -1x = -0.8x AMLP = -0.7x BZF = FXB IHY -0.6x -1.1x THD = -0.2x FXS = -1.1x = RWX -1.3x VEGI = 0.4x XLE = -0.8x = 0.1x FOIL = -0.7x AYT ARGT EWT = -0.9x JJC = -1.4x EIS CEW = -0.8x -0.2x -1.3x = EWY RLY SMIN QMN = -0.6x -1x = 1x BWZ -0.2x = -1.3x EWN = 0.2x AAXJ -0.1x ECH CCX -1.3x VNM = -1.1x EWUS = -0.5x EWW = -1.3x BWX = -1.2x IBND = -1.4x = JO -1.3x = -1x EUFN -0.8x DXJS EEM EWCS UUP = 0x -0.8x GUR = -1.3x EDV TLT = -1.3x FXE = 1.6x 1.6x = FLAT -1.3x = 1.5x GML -1.3x EWP = -1.1x CQQQ EPU = EWZ = -0.7x GMF -1.3x ALD = WIP STPP -1.2x = FXA = -1.2x -1.5x = 0.0x -1.4x ZROZ = 1.7x = EU -1.3x EWZS FXC = EWS -1.2x -1.5x -0.2x = = -1.7x -2.0x -1.5x -1.0x 1.4x -1x COW -1.2x -0.5x -1.4x IBB = 1.1x EWC = -1.3x UNG = -1.4x BNDX = 0.0x 1.4x 0.5x 1.0x 1.5x 2.0x EWO = -1.1x ECNS = -1.1x DBA = -1.6x PALL = -0.7x DXJ = -0.4x -0.5x VNQ IYR = 1x 1x EIDO = -0.9x XLU = ITA EIRL 0.3x = -0.5x EWL ITB 0.7x = -0.8x = 0.1x NIB = -1.5x XLB = -0.9x CYB = -1.5x IHE XTL = 0.4x = -0.5x FPX = -0.4x SOYB = -1.3x IWP IWR = = -0.4x -0.4x IWO = -0.3x XLV = -0.1x FXI = -0.2x -1.0x IHI 0.1x IWF -0.6x IWS = -0.6x QQQ = IUSG -0.7x = XLI -0.6x KRE XLY = -1.3x = IWM -0.3x ENZL = TUR -0.7x = -1.3x = -0.8x IWN -0.8x = -1.1x CORN = -1.1x MTUM = -0.5x XRT = -0.3x WEAT = -1.3x IYT VLUE = IWB USMV -1x IWV = SMH = -1.1x -1x -0.9x = -0.4x = -0.7x CAF = -0.2x SPY = -1x OEF IAI XLK KIE = -1.1x -1.3x IWD IUSV = -1.1x XLP -1.3x = -0.6x -1.2x -1.2x CHIX = -0.3x -1.5x XLF QAI = -1.2x = -1.9x DIA = -1.2x 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. -2.0x x-axis: Delta from Trailing 6M Average HEDGEYE 5
QUANTIFY: MOMENTUM (CONTD.) HEDGEYE 6
QUANTIFY: EXTREME MOMENTUM Extreme Momentum Monitor (Top-20 and Bottom-20 VAMDMI Readings) (QAI) IQ Hedge Multi-Strategy Tracker (FXC) CurrencyShares Canadian Dollar Trust (DBA) PowerShares DB Agriculture Fund (CYB) WisdomTree Chinese Yuan Strategy Fund (NIB) ipath Dow Jones-AIG Cocoa Total Return Sub-Index ETN (STPP) ipath US Treasury Steepener ETN (EU) WisdomTree Euro Debt Fund (EWZS) ishares MSCI Brazil Small-Cap ETF (UNG) United States Natural Gas Fund (JJC) ipath Exchange Traded Notes Dow Jones-AIG Copper Total Return Sub-Index (FXA) CurrencyShares Australian Dollar Trust (CCX) WisdomTree Commodity Currency Fund (KIE) SPDR Insurance ETF (FXE) CurrencyShares Euro Trust (ENZL) ishares MSCI New Zealand Capped ETF (EIS) ishares MSCI Israel Capped ETF (EWC) ishares MSCI Canada ETF (EPU) ishares MSCI All Peru Capped ETF (UDN) Powershares DB US Dollar Index Bearish Fund (GUR) SPDR S&P Emerging Europe ETF (VNQ) Vanguard REIT ETF (SMIN) ishares MSCI India Small-Cap ETF (IBB) ishares Nasdaq Biotechnology ETF (PFF) ishares US Preferred Stock ETF (GLD) SPDR Gold Shares (WDTI) WisdomTree Managed Futures Strategy Fund (UUP) PowerShares DB US Dollar Index Bullish Fund (BNDX) Vangaurd Total International Bond Market ETF (FLAT) ipath US Treasury Flattener ETN (SHY) ishares 1-3 Year Treasury Bond ETF (EPHE) ishares MSCI Philippines ETF (VXX) ipath S&P 500 VIX Short-Term Futures ETN (TIP) ishares TIPS Bond ETF (TLT) ishares 20+ Year Treasury Bond ETF (MUB) ishares National AMT-Free Muni Bond ETF (EDV) Vanguard Extended Duration Treasury ETF (ZROZ) PIMCO 25+ Year Zero Coupon US Treasury Bond ETF (AGG) ishares Core US Aggregate Bond ETF (BND) Vangaurd Total US Bond Market ETF (LQD) ishares iboxx $ Investment Grade Corporate Bond ETF -1.9x -1.7x -1.6x -1.5x -1.5x -1.5x -1.5x -1.4x -1.4x -1.4x -1.4x -1.4x -1.3x -1.3x -1.3x -1.3x -1.3x -1.3x -1.3x -1.3x 1.0x 1.0x 1.1x 1.1x 1.2x 1.3x 1.4x 1.4x 1.5x 1.5x 1.5x 1.6x 1.6x 1.6x 1.6x 1.6x 1.7x 1.7x 1.8x 1.9x -2.5x -2.0x -1.5x -1.0x -0.5x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 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
QUANTIFY: ASSET CLASS BREADTH 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of ETFs with a VAMDMI Score > +1x Percentage of ETFs with a VAMDMI Score < -1x 37% 30% Fixed Income & Yield Chasing 25% 3% 3% 33% 0% DM Equities EM Equities Foreign Exchange Commodities Cash 64% 9% 39% 100% 0% This chart shows the relative strength or weakness at both the primary and secondary asset class levels based on the breadth of momentum across the constituent markets that comprise each primary asset class. This snapshot of momentum is an effective way for investors to quickly determine which asset classes offer the best opportunities for relative value trades. Trends in this indicator of asset class breadth formulate the basis upon which TACRM generates its asset class rotation signals as detailed on the next two slides. HEDGEYE 8
y-axis: Delta from Trailing 3M Average QUANTIFY: ASSET CLASS ROTATIONS TACRM ASSET CLASS ROTATION MONITOR -150% -100% Fixed Income & Yield Chasing 0% = 21% -50% 0% DM Equities = 21% EM Equities = 12% 50% 100% 150% 200% Commodities = 8% -10% Foreign Exchange = 1% Passive Trend Follower Asset Allocation 20% 10% -20% -30% -40% -50% x-axis: Delta from TTM Average Cash = 38% 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
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% Cash = 38% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% EM Equities = 12% DM Equities = 21% 25% Fixed Income & Yield 20% Chasing = 21% Commodities = 8% 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 10
QUANTIFY: STYLE FACTOR MOMENTUM U.S. Equity Style Factor VAMDMI Ranker (KIE) SPDR Insurance ETF -1.35x (KRE) SPDR S&P Regional Banking ETF -1.26x (OEF) ishares S&P 100 ETF -1.26x (IWD) ishares Russell 1000 Value ETF -1.25x (XLF) Financial Select Sector SPDR Fund -1.22x (IUSV) ishares Russell 3000 Value ETF -1.21x (DIA) SPDR Dow Jones Industrial Average ETF Trust -1.15x (VLUE) ishares MSCI USA Value Factor ETF -1.11x (XLK) Technology Select Sector SPDR Fund -1.11x (IWN) ishares Russell 2000 Value ETF -1.10x (IAI) ishares U.S. Broker-Dealers ETF -1.09x (SPY) SPDR S&P 500 ETF Trust -1.05x (IWB) ishares Russell 1000 ETF -0.97x (IYT) ishares Transportation Average ETF -0.97x (IWV) ishares Russell 3000 ETF -0.95x (XLB) Materials Select Sector SPDR Fund -0.92x (IEZ) ishares U.S. Oil Equipment & Services ETF -0.90x (XLE) Energy Select Sector SPDR Fund -0.85x (XLI) Industrial Select Sector SPDR Fund -0.81x (AMLP) Alerian MLP ETF -0.74x (SMH) Market Vectors Semiconductor ETF -0.72x (IWM) ishares Russell 2000 ETF -0.70x (QQQ) PowerShares NASDAQ Trust (ETF) -0.69x (XLP) Consumer Staples Select Sector SPDR Fund -0.61x (IUSG) ishares Russell 3000 Growth ETF -0.60x (IWS) ishares Russell Mid-Cap Value ETF -0.59x (IWF) ishares Russell 1000 Growth ETF -0.56x (XTL) SPDR S&P Telecom ETF -0.53x (MTUM) ishares MSCI USA Momentum Factor ETF -0.47x (IWR) ishares Russell Mid-Cap ETF -0.44x (FPX) First Trust U.S. IPO Index Fund -0.42x (IWP) ishares Russell Mid-Cap Growth ETF -0.41x (XOP) SPDR S&P Oil & Gas Exploration & Production ETF -0.41x (USMV) ishares MSCI USA Minimum Volatility ETF -0.38x (XLY) Consumer Discretionary Select Sector SPDR Fund -0.31x (XRT) SPDR Retail ETF -0.31x (IWO) ishares Russell 2000 Growth ETF -0.28x (XLV) Health Care Select Sector SPDR Fund (IHI) ishares U.S. Medical Devices ETF (ITB) ishares U.S. Home Construction ETF (ITA) ishares U.S. Aerospace & Defense ETF (IHE) ishares U.S. Pharmaceuticals ETF (XLU) Utilities Select Sector SPDR Fund (GDX) Market Vectors Gold Miners ETF (VNQ) Vanguard REIT ETF (IBB) ishares Nasdaq Biotechnology ETF (PFF) ishares US Preferred Stock ETF -0.06x 0.10x 0.14x 0.32x 0.43x 0.72x 0.87x 0.97x 1.08x 1.09x -1.5x -1.0x -0.5x 0.0x 0.5x 1.0x 1.5x Observing trends in momentum within the U.S. equity market can help investors front-run major shifts in performance at the sector and style factor levels. Knowing which sectors and style factors to over/under-weight is yet another way TACRM helps investors beat index beta. HEDGEYE 11
9 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 JPM Global Aggregate Bond Index 560 8 7 6 5 4 3 2 1 0 540 520 500 480 460 440 420 400 380 HEDGEYE 12
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 13
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 14
9 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 8 7 6 5 4 3 2 1 0 29 28 27 26 25 24 23 22 HEDGEYE 15
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 16
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 17
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