The Quantitative Hedge product range is a new modality of automatic trading systems designed to perform a risk-hedging function, when combined with the purchase of European shares. For that purpose hedging trading systems used only short positions on the most liquid futures contracts of each respective financial market. The range is designed to cover 90% of the European market. Trading with index futures contract instead of taking short positions on stocks reduces the cost of hedging. It is intended primarily for professional equity managers, who wish to include an alternative mechanism to protect profits from market failures and maintain the profits achieved in the past. But it would also be aimed at small investors interested in self-managing their own capital, with more peace of mind. The development of the system includes optimization processes based on and tested with past historical data, so it is not guaranteed in any case that these results will occur in the future. Past results do not guarantee future results in any case. THE ACHILLES HEEL OF VALUE FUNDS, THE TITANS OF VARIABLE INCOME If you are a professional equity analyst and a loyal follower of the value investing philosophy, in any of its aspects, to see the next chart should not have doubts in identifying who is Mr. Market and who is Mr. Value. Better results than those obtained by market reference index, but with rather volatile movements, and betas above 1, would identify the typical facial features of Mr Value. I have chosen, (as an example for the research process), the analysis of one of the best Spanish value funds, for its style, good results obtained in the pass, and quality in the management team, which I've been following for a long time, that is the Metavalor FI, whose value funds information is published in its web site and CNMV, but it would have been indifferent to choose funds like the Bestinver for the research paper, also. Fuente: https://www.metagestion.com/metavalor 1
How do value investing funds,... when the market falls? As it happens that the weak point of this management style, in the vast majority of value funds, precisely draws the shape of a heel... due to Newton's physical principle, everything that rises has to go down, already stronger is the rise, the stronger is the decline, so they tend to fall more than the market before the arrival of downward phases. This is technically expressed by saying that are funds with beta greater than 1, that is, market movements of 1% translate into movements greater than 1% on the value fund. Using the excel simulator available on his web we see that an investor who would have invested 50,000, in the date 01-03-2007, loses half of the capital invested if it decides to sell it just two years later. This means technically that it has a drawdown or maximum loss of 50% As value funds are also characterized by a stronger rise to the market or benchmark in upturns, then a significant part of the accumulated profits made during the past disappear when the storm arrives, closing the fork of the profit differential obtained by the managers, with respect to what would have obtained a buy & hold passive management. (Replicate the index buying the shares that compose it). If there are also market conditions of no liquidity, may even cause the collapse or closure of the fund, when trying to withdraw investors their capital in a massive way, this fact almost sank the great Spanish titan Bestinver Value Fund. Therefore, value funds do not usually use hedging strategies, which greatly increases the volatility, and the high risk to be assumed by the investor. This lack of liquidity is mainly due to the fact that value managers tend to have a predilection for companies which go unnoticed to the market, and are not correctly rated, and therefore companies less 2
visible are usually undervalued, but have the drawback that they are less liquid. In addition portfolios are very concentrated in few values. 3
How has it solved these deficiencies the value industry...?,, Instead of incorporating quantitative managers into their risk departments, that would have been reasonable way, the value industry has chosen to indoctrinate the customer to be patience, to have a longterm investment view, to trust in the management team, and where before the arrival of market earthquakes the best alternative is to have faith, to wait and to remain inside the ship for at least 10 years, because the loss of wealth will recover, and it is only a matter of time.is there any way to minimize the relative risk associated with this management style? That is a good question. after researching on the subject I have decided to launch a range of product that could alleviate to some extent, this chronic pathology that suffers the value industry. The object of the research process has been to develop an specific hedging trading system, which generates only bearish trading signals, with the exclusive purpose of hedging. When the model detects that a bearish swing is taking place in futures market, adopts bearish positions to counter the losses, having a negative correlation with the market, but with positive mathematical expectation, and there lies its complexity. Therefore when it detects a bullish market phase the system withdraws from the game, since it understands that there are others who do it better, humility. The final aim is to try to obtain an optimal combination between equities and hedges that will cushion the market's earthquakes, optimizing the risk-return ratio and reducing the volatility of the fund, but keeping long term profits. What is the theoretical principle on which the range of hedging trading systems models is based? Using statistical simulation techniques, we see that the average result of combining something that has long-term positive hope (as example the market represented by the blue line) with something that has a long-term positive hope but also have negative correlation (example hedging trading system) with the market index, it is something that oscillates rather less (represented by the red line) but which maintains its mathematical expectation with less volatility. That means technically that we increase the Sharpe Ratio. "....Is saying we seek to reduce variance or volatility,.....but we hold hope..." In the example above, the extreme case of a hypothetical market representation with positive drift is shown by the blue line, a trading system with perfect inverse correlation equal to -1 and with positive drift, green line. The red line would be the theoretical result of combining both simulated stochastic processes at 50%. Red line, that is the average between market & sat, have no volatility on the extreme case, but maintain its upward trend. 4
Why does the system never take bullish positions? The main reason is that if the system adopts bullish positions it will probably make it worse than a good value manager, so it takes the best possible option and the robotic manager automatically deactivates, leaving the value manager to act. In resume, the philosophy of the system would look like this: "... let the machine act in situations of nervousness, and let the human act in situations of tranquillity" The basic scheme of the algorithm: When the market becomes likely bearish, the system will automatically activate. When the market becomes bullish, it is deactivated. Another fundamental characteristic of the hedging trading system is that it takes special care and is very rigorous at the statistical parameters valuation in generating bearish positions in a context of high volatility, but... Why should we be so rigorous in contexts of extreme volatility when it comes to requiring a trading system to adopt bearish positions...? Because the best profitability opportunities in the value management style arise precisely there, when market volatility is very high and the Price Earning Ratio falls considerably, if incorrect hedging positions are taking in phases of high volatility, we are going to lose the big profits that will arise later and we will probably be late for the party. So we must be especially cautious when demanding to the trading system that activates on a hedge mode, since it could pay very expensive. Performance IBEX QUANTITATIVE HEDGE (COVERAGE) SISTEMA IBEX 250000,00 200000,00 150000,00 100000,00 50000,00 0,00-50000,00 03/01/2000 19/09/2000 14/06/2001 07/03/2002 25/11/2002 21/08/2003 14/05/2004 04/02/2005 20/10/2005 10/07/2006 26/03/2007 10/12/2007 01/09/2008 25/05/2009 09/02/2010 25/10/2010 12/07/2011 23/03/2012 07/12/2012 27/08/2013 16/05/2014 30/01/2015 15/10/2015 01/07/2016 Straight lines are periods of time in which the system is deactivated, due to the lack of optimum conditions required for the system, to be positioned short. It is very important that the deactivation is done in time, since after achieving high levels of volatility and Price Earning Ratio (PER) near to 5 or 6..., the market experiences a spectacular rise later. 5
Basic statistics of the back-testing process: Ibex Quantitative Hedge trading systems. Performance summary Ibex Quantitative Hedge Main chart: IBEX minute bars [04/03/1996-18/01/2017] Net P&L 183.648,23 Gross P&L 205.110,00 Profit factor 1,30 Sharpe ratio 0,788 Slippage per side -2,23 Commission per side 5,75 Annual ROI 8,79 % Mathematical expectation 268,46 Session analysis Analyzed sessions 5278 Sessions in market 1329 Winning sessions 691 Winning sessions profit 783.109,28 Winning sessions average 1133,30 Losing sessions 638 Losing sessions profit -599.461,05 Losing sessions average -939,59 Worst drawdown -27.238,00 19/05/2008 Best session 11.137,12 24/06/2016 Worst session -6.165,75 24/01/2008 6
Suppose you had invested 50,000 in the Metavalor fund in the year 2000, according to the Excel simulator available on your website, the result would have been the following at the closing date 2016: Product Initial value Final value Initial date Final date Metavalor 50.000,00 204.183,75 05-01-2000 31-12-2016 Suppose you invested 50,000 in the Metavalor fund in 2000 but also subscribe to the Ibex Quantitative Hedge Coverage trading system, the simulated result would have been the following as of the end of 2016: Product Initial value Final value Initial date Final date Metavalor + IQC 100.000,00 388.543,22 05-01-2000 31-12-2016 IbexQuantHedge 450000,00 400000,00 350000,00 300000,00 250000,00 200000,00 150000,00 100000,00 50000,00 0,00 05/01/2000 06/08/2001 13/09/2002 19/09/2003 21/09/2004 18/10/2005 19/10/2006 17/10/2007 14/10/2008 12/10/2009 05/10/2010 26/09/2011 14/09/2012 06/09/2013 01/09/2014 24/08/2015 16/08/2016 As can be seen in the graph above, a significant reduction in risk and volatility levels is done, but keeping profits. 7
Other available systems developed to European equities, targeting European professional equity managers: SAT Trading system: CAC Quantitative Hedge. (Coverage) 250000 200000 150000 100000 50000 CAC40 + SAT SAT Quantitative Coverage CAC40 0-50000 03/01/2000 31/07/2000 27/02/2001 25/09/2001 25/04/2002 18/11/2002 18/06/2003 13/01/2004 06/08/2004 28/02/2005 22/09/2005 19/04/2006 10/11/2006 12/06/2007 07/01/2008 01/08/2008 26/02/2009 23/09/2009 21/04/2010 11/11/2010 07/06/2011 29/12/2011 24/07/2012 14/02/2013 09/09/2013 02/04/2014 27/10/2014 27/05/2015 17/12/2015 14/07/2016-100000 The blue chart shows the evolution of the French market in isolation, the evolution of the CAC Quantitative Hedge system with the pink line in isolation, and the combined evolution of an investor who would have invested in the French market but also using the SAT (trading systems) represented with the green line. A 16 year history (years 2000 to 2016), it is shown. The system has the same fundamental characteristics as the Ibex Quantitative Hedge. 8
SAT Trading system: DAX Quantitative Hedge. (Coverage) 500.000,00 400.000,00 300.000,00 200.000,00 100.000,00 SAT Dax Quantitative Coverage DAX + SAT DAX 0,00-100.000,00 03/01/2000 17/08/2000 04/04/2001 19/11/2001 11/07/2002 27/02/2003 14/10/2003 03/06/2004 17/01/2005 31/08/2005 13/04/2006 28/11/2006 19/07/2007 06/03/2008 21/10/2008 12/06/2009 28/01/2010 13/09/2010 29/04/2011 09/12/2011 25/07/2012 13/03/2013 25/10/2013 18/06/2014 05/02/2015 23/09/2015 12/05/2016 23/12/2016-200.000,00 The blue chart shows the evolution of the German market in isolation, the evolution of the DAX Quantitative Hedge system with the pink line in isolation, and the combined evolution of an investor who would have invested in the German market but also using the SAT (trading systems) represented with the green line. A 16 year history (years 2000 to 2016), it is shown. The system has the same fundamental characteristics as the Ibex Quantitative Hedge. 9
SAT Trading system: FTSE Quantitative Hedge. (Coverage) 300000 250000 200000 150000 100000 50000 SAT SAT+FTSE FTSE 0-50000 03/01/2000 03/07/2000 02/01/2001 03/07/2001 04/01/2002 05/07/2002 08/01/2003 09/07/2003 12/01/2004 09/07/2004 06/01/2005 06/07/2005 03/01/2006 04/07/2006 03/01/2007 04/07/2007 04/01/2008 04/07/2008 07/01/2009 08/07/2009 07/01/2010 07/07/2010 04/01/2011 04/07/2011 30/12/2011 29/06/2012 02/01/2013 03/07/2013 30/12/2013 30/06/2014 24/12/2014 25/06/2015 21/12/2015 22/06/2016 19/12/2016-100000 -150000-200000 The blue chart shows the evolution of the Italian market in isolation, the evolution of the FTSE Quantitative Hedge system with the pink line in isolation, and the combined evolution of an investor who would have invested in the Italian market but also using the SAT (trading systems) represented with the green line. A 16 year history (years 2000 to 2016), it is shown. The system has the same fundamental characteristics as the Ibex Quantitative Hedge. Product: IBEX Quantitative Hedge https://www.tradingmotion.com/explore/system/performancesheet?id=17597 Product: DAX Quantitative Hedge https://www.tradingmotion.com/explore/system/performancesheet?id=17599 Product: CAC Quantitative Hedge https://www.tradingmotion.com/explore/system/performancesheet?id=17598 Product: FTSE Quantitative Hedge https://www.tradingmotion.com/explore/system/performancesheet?id=17596 For trading licenses, or any questions you can contact Trading Motion, or directly with the developer. jesusmartinpalacios@gmail.com Developer: Finanzas Cuantitativas www.tradingmotion.es ibroker Global Markets SV 10