Some months have passed since the start of this blog, and throughout those months the stock markets of the world (particularly of the United States) have done rather well. In the US there has been a strong rally since the November 1 of 2016 monthly chart low that has amounted to a whopping 17% gain— in SPY, the ETF that tracks the S&P500 index, as of June 1, 2017, if you had reinvested dividends.
A benchmark that's up on the Retail Backtest website that is based on 10 major ETFs of developed nations is up about 12% over the same period— again that's with dividends reinvested (total return). And so you may ask, "And how is the smarty-pants Proprietor of Retail Backtest doing with his project?" Or, "How are the smarty-pants hedge fund managers and their 'quant' buddies doing?" You had to ask!
|Buy-and-Hold Exchange-Traded Indexing Funds (SYM)||% Return YTD|
|SPDR® S&P 500® ETF (SPY)||9|
|PowerShares QQQ (QQQ)||19|
|SPDR® S&P MIDCAP 400® ETF (MDY)||5|
|iShares Russell 2000 ETF (IWM)||3|
|Hedge Fund Research, Inc.— Indices||% Return YTD|
|Quantitative Directional Index||5.2|
|Fundamental Value Index||4.6|
|Equity Hedge (Total) Index||5.1|
|Retail Backtest's Momentum Portfolios||% Return YTD|
|Retail Backtest's New Program Portfolios||% Return YTD|
The "% Return YTD" figures are really for the first five months, the data for the first part of June being not yet available for some of the items. And all of the figures are representative of total return. As you can see, equity hedge funds, the second table from the top above, didn't do so well compared to the buy-and-hold prospects of the uppermost table above. That is, if you had bought and held an assortment of ETFs such as SPY, QQQ, MDY and IWM (those are the symbols), then you would be sitting pretty about now. Yes, you would have beaten the smarty-pants boys everywhere! And thus far this year the Retail Backtest project has also done poorly compared to buy-and-hold.
I'd have to say that generally, when the market is surging forward with a very vigorous rally, any approach similar to either the New Program or Momentum Program of the Retail Backtest project, or to that of a hedge fund, that incorporates the flexibility to systematically exit long positions or to be hedged with short positions will then generally not perform as well as the market.
Consider this. The long-only approach to which I'm presently committed does not involve any use of leverage, but... it does involve scaling out of long positions when the circumstances suggest the possibility of an impending downturn. That's how it came about that the Retail Backtest portfolios all show, in backtesting, very good performance during the dot-com crash of 2000 and the 2007-08 Lehman Brothers/subprime financial crisis. But that means that there is a certain one-sidedness: if the market goes down long positions are reduced, but if the portfolio is already 100% long and the market starts to look even better there can be no further scaling in. In effect, due to the limitation of allowing no use of leverage— trust me, that's the prudent approach— there can be no "making hay while the sun shines."
The other remark that must be made is that of course any sane method for allocating assets must be based on a long view. You can't really assess the validity of any approach in the short term. Testing of any proposed approach occurs against a backdrop of mainly-random outcomes, and so the data points of only a few recent months will not suffice to determine the statistical significance of any particular outcome.
Update: The failure of "Retail Backtest's New Program Portfolios" to keep up with the marketplace during the rally that started in November of 2016 actually ended at about the start of March 2017, with the rebound of the Sector portfolio being particularly strong.