S&P 500 Smart Beta Low Deviation

 


Category : Smart Beta

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S&P 500 SMART BETA LOW DEVIATION

 

 

 

S&P 500
Smart Beta Low Deviation

Benchmark:
S&P 500

Cumulative Performance

27.79%

24.50%

Annualized Performance

14.38%

12.76%

Annualized Volatility

11.58%

11.63%

Max Drawdown (Day)

-2.51%

-2.53%

Average Daily Exposure

103%

100%

 

1) Strategy Specific information

S&P 500 Smart Beta Low Deviation aims at outperforming the S&P 500, its benchmark, over the recommended holding horizon (1 year).

S&P 500 Smart Beta Low Deviation is an improvement on low-cost beta investing, thanks to a tactical allocation overlay. The strategy implements temporary deviations from the benchmark by over/under-weighting the exposure to the benchmark itself. This ensures that the strategy represents a purely tactical and timing-based process, without any factor (value, growth), market-cap (small cap) or risk-weighted (equal-weight, minimum variance, etc.) approach.

The strategy is always long the benchmark, and enters into tactical tilts (+/- 10%) of limited duration based on the detection of probable bullish or bearish movements. A behavioural analysis determines the excesses of the benchmark, and contrarian tilts are therefore implemented to trade against those excesses (underweight after a bullish excess, overweight after a bearish excess).

The strategy aims at generating similar volatility and drawdown measures to those of the benchmark, but with a greater annualised performance.

2) The “Complexity” family of strategies

All the strategies in the “Complexity” range are grounded in the research in complex systems, as those systems offer a better analogy with financial markets than Modern Financial Theory (MFT). The frequent bouts of exuberance, intense risk-aversion or herd behaviour observed on financial markets invalidate the main assumptions and conclusions of MFT and question the validity of long-term forecasting. In fact, prediction in financial markets more closely resembles weather forecasting than odds calculation in a lottery: in meteorology as in financial markets, the accuracy of predictions decreases rapidly as the length of the prediction increases. “Better predict 7 times the weather for tomorrow than once for the whole week!” Long-term statistics in weather forecasting actually back this saying, with around 85% success rate for overnight prediction versus slightly more than 50% over a 10-day horizon.

The endogenous instability and non-linearity observed on financial markets render inefficient the traditional equilibrium approaches and normal distribution assumptions: prediction has to accommodate the existence of unpredictable chaotic phases, and the appropriate tools should therefore be used. This toolbox is found in statistical physics, at its root the study of large numbers of particles and their interactions. This strategy makes large use of such tools. Moreover, the strategy uses concepts first introduced by B. Mandelbrot, the 20th-century mathematician, who coined concepts such as self-similarity, Noah & Joseph effects, etc.

This strategy makes full use of those concepts to achieve a robust, dynamic and auto-adaptive pattern-recognition process. This performance engine is built on sound statistical physics methods, such as numerical analysis, denoising, filtering, etc.

High-frequency and high-quality data is needed for this strategy as only price data is used as raw material in the process. The quality of data is monitored continuously and 2 separate sources are used to ensure continuity and reliability. The numerical analysis relies on the use of 1-, 5- and 15-minute data points.