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US Tech Stocks: An Active Investment Strategy

by Patrick Oberhaensli, on Dec 14, 2020 12:21:00 PM

In 2020, the US Growth Stocks Long/Short/Out strategy resulted in a maximum drawdown of 10.92% versus 28.56% for the long-only passive strategy. If we were to put these two approaches at the same basis in terms of the level of risk, then the alternative approach would have outperformed the long-only one by 16.67% so far in 2020 (as of the 9th of October 2020). In this article, we will explore the main characteristics and the background of the US Growth Stocks Long/Short/Out strategy especially when it comes to the year 2020 and the flash crash in equities.

HKCM ABO 2020

 

 

Characteristics of the Lower-Risk Alternative Strategy

Let’s start with an overview of the key characteristics of a unique active lower-risk (single market) managed futures strategy.

For the period starting end of January 2000 up to the 2nd of October 2020, including specific costs, we have following results for the US Growth Stocks Long/Short/Out (this implies that the investor is not always in the market – in other words, there is also an Out of the market “position”).

Tech Stocks Active Strategy

The first observation is that with an active strategy, the average return versus the risk level taken is strongly improved. In fact, the return more than doubled while the volatility is almost 5 percentage points lower. Therefore, the Sharpe Ratio at 0.62 becomes quite attractive.

Moreover, this active approach exhibits a beta that is virtually zero which provides a relevant indication of the strong diversification power as well as with other traditional asset classes beyond equities.

Most notably, we see that with the Long/Short/Out format the maximum drawdown is cut by more than half! (hence, the "lower risk" categorization). This is even more relevant considering that the percentage months with a positive return is 59%, well above 50%.


Key Elements of Strategy Development

If a diversified risk-based strategy considers risk inputs rather than market prices it will, as with trend-followers, look to be negatively correlated with equities when equities do fall.

Now, in the case of a single equity market exposure, the focus is on exhibiting a beta that is close(r) to 0 (no matter if it’s negative or positive). Combining different models (for the same market) allows investors to increase neutrality while reducing further the maximum drawdown as a consequence.

Contrary to a trend-follower, on March 23, 2020 the investor with the risk-based strategy would have gone long right after the very low while being out of the market for a several weeks before, since a potential risky situation was identified. That’s exactly the type of behavior that this active approach should show and it actually led to the best monthly performance when considering returns since 2012.

The trend-follower will always be late when there is a trend developing (even more so when it reverses) – as the investor needs to first identify that the situation is trending.

What’s also important, is that in order to preserve capital, the investor needs to be at least out of the market (but preferably short) when there is a rapid down-move. How can investors foresee a rapid down-move? Well, exploding implied volatility is a typical indicator of a sharp down move – but as such investors might not be able to anticipate the drop early enough.

 

Conclusion

 

This attractive US Growth Stocks Long/Short/Out managed futures strategy is very simple to implement (only one type of -very- liquid futures) and it could also be effortless leveraged to a certain point. It can constitute one (or even the only) key component(s) of an AMC, an Actively Managed Certificate. Ultimately, we clearly see that the risk adjusted return can be quite higher with the Long/Short/Out approach in comparison to the more common active techniques such as classic technical analysis.


EVOLIDS FINANCE LLC, Disclaimer:

  • This content is not intended to be a solicitation nor an offer
  • The preparation of the information provided herein is done with a high level of care. Nevertheless, errors are possible
Topic:Asset AllocationActive TradingInvestment StrategyDiversificationUS Stock MarketFuturesStock Trading
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