How would you rate this mechanical system performance?

Discussion in 'Strategy Development' started by Cutten, Dec 4, 2008.

  1. I've been using a long-only mechanical ETF investing system for the last 3 years (actually 2 years 11 months, but it's almost entirely in cash right now so this year's results shouldn't change much from now). It invests in stocks, bonds, REITs and commodities, like a normal diversified buy & hold portfolio, except it has a risk-control method to totally avoid serious bear markets.

    When I initially backtested it, the average return was about 11% over the prior 50 years, maximum peak-valley drawdown was around 10%, and there were no down years on a calendar basis - this includes 1973-74, 1987, 2000-2003, and 2006-2008 (live).

    I also tested using conservative leverage, and it increases the max drawdown by slightly more than it increases the return. The return is in the mid teens over the long-run using reasonable leverage, max drawdown goes into the mid to high teens.

    Here are the numbers for the last 3 years, with real money:

    Year S&P System Leveraged

    06 +15.2% +14.5% +25.4%
    07 +5% +7.7% +12.5%
    08 -40.4% +2.7% +4.9%

    Return -27.7% +26.6% +48%
    per yr* -9.25% +8.15% +14%

    * compound % return per annum

    Given the backtested results, and that it is a long-only system (it sometimes goes to cash, but can't short), how would you rate the performance - both the live performance 2006-2008, and the back-tested performance (I tried to use very realistic transactions costs and slippage assumptions. Turnover is fairly low)?
  2. Any mechanical system that is profitable is pretty good. Look at collective2, thousands of systems and only a handful worth a second look.
  3. Daal


    11% returns 10% drawdowns with no losing years sounds good. I assume the system uses some kind of moving average criteria to dodge bears?
  4. Corey


    Does that say -40% for 2008? Can you clarify your table there?
  5. It's a mechanical system with a 1:1 risk:reward level, whether you trade it leveraged or not.

    I would say go back to the drawing board and either try to increase your expectancy or increse the risk:reward (positively, LOL).

    If you can get 1:2 you're on solid ground, then you can get OPM and sit back. :D
  6. For a long term investment portfolio, traded on a mechanical basis, generating un-leveraged non-compounded returns of 15%, 8%, and 3% over the last 3 years is excellent. Especially impressive is the performance this year.

    Do your system rules allow you to go "long," for example, the TBT UltraShort Lehman 20+ Year Treasury -- essentially short US Treasuries? If not, I would be interested in the reasoning.
  7. ScottD


    Cold/Jasonn/Apak (and for a brief time 'The Illuminated One'), we missed you.

    You really are one of the more humorous people here. Being honest, you make me laugh, in a good way, more than anyone on ET.

    I also like your hard core "I had to walk up hill to school both ways" stories from Kazakhstan or wherever.

    Stick with your usual stuff though. By now most know your real trading story. Best not to provide commentary with the premise that you are a profitable trader. Oh wait, what am I thinking, this is ET and there is tradition to uphold -- carry on sir!
  8. Daal


    this type of position trading/investing is for the big boys. go ask Anekdoken to compound 11% with no losing years for 10 years in a $200m capital base. I lay 5-1 he can't
  9. That's the S&P return for 2008. I listed the S&P return in the first column, the system return in the 2nd, and the leveraged system in the 3rd. I had it formatted but the posting removed that, hence the confusion.
  10. Actually leverage reduces reward/risk ratio, because leverage is not free. Because it's a long-term system, if you are 200% long for half a year, you'll be paying margin interest for 6 months on your full account balance, which drags down the returns.

    1:1 risk/reward long-term is pretty good - about 9 times better than the long-term Dow risk/reward, for example, and better risk/reward than pretty much every star value investor. Most money-managers have drawdowns bigger than their long-term annual compound return.
    #10     Dec 5, 2008