Trends in LA (CFA pres)

I’ll very likely be in attendance…


Tuesday, July 16th, 2013


Alex Greyserman, PhD
Chief Investment Officer – ISAM Systematic


Jack Weiner
Head of Sales, Americas – ISAM Systematic

Chair: Erik Einertson, CFA

An Alternative Investments Group Event

The presentation entitled “Trend Following: An Overview of Methodology and Return Characteristics” or as we refer to it the Trend Following Teach-In, is designed to further educate and demystify the strategy for several of our largest institutional clients.  It offers a general overview of the strategy and includes explanations around the source of risk premia that delivers the strategy’s returns, expectations of risk, methods of benchmarking, and strategy for risk allocation within a broader portfolio.  The analysis draws upon detailed research papers on the nature of trend following, which are produced by the ISAM Research team as well as analysis from academia.  The aim is to provide clarity and deep insight for both current and prospective investors into what can be described as an uncorrelated asset class with strong Crisis Alpha characteristics.

2013 First Half Review

How are most asset classes performing so far in 2013?  The best performers list is dominated by US stock categories, and the other end is largely commodities, foreign stocks, and bonds.

US Small caps lead the pack up 18%, while precious metals are down the most at -30%.  






40 sorted

Stockpicking Contest with $65k in Prizes

SumZero and Value Investing Congress are partnering up for their annual stockpicking contest…

We’ve had a few five figure winners from blog readers in past contests, let’s get some more!

$65,000 in prizes for the 3 finalists! Like last year, our grand prize winner will take the stage at the 9th Annual New York Value Investing Congress, taking place September 16th & 17th at Jazz at Lincoln Center’s Fredrick P. Rose Hall, and present their winning idea to an audience of elite investors. But this year he or she will also take home a robust cash prize of $50,000, and our 2nd and 3rd prize winners will also receive cash prizes of $10,000 and $5,000, respectively. All 3 finalists will receive a one year subscription to FactSet as well as free admission to the Value Investing Congress and Pre-Congress workshop. All contestants are eligible to receive a special trial offer to FactSet products as well.

How Can I Enter?
Starting July 15th, submit your finest investment idea in written form to this site. Your pitch must be 500 – 3,000 words in length and the company/opportunity you focus on must have a market capitalization of at least $500 million (USD). Preference will be given to write-ups on companies with greater liquidity, as well as those with a significant discussion of valuation factors and catalysts.

Beyond these minimal requirements, any and all types of investment ideas and strategies are welcome. This includes spin-offs, special events, turn-arounds, shorts as well as various asset classes outside of common equities, including preferreds, credit, derivatives and others.

Eligibility requirements include being an active SumZero member working on the buyside.

Some other conferences below…

Most are offered once a year with various deadlines:

Research Papers

S&P SPIVA ($30,000 + $15,000)

AQR Insight ($100,000 prize)

Whitebox Research ($25,000 prize)

NAAIM Wagner Award ($10,000 prize)

MTA Dow Award ($5,000 prize)

- See more at:

What Happens When You Buy Assets Down 80%?

We’ve done a lot of articles on value and drawdowns on the blog before (search the archives).  I was curious what happens when you bought the US equity sectors back when they were really hammered (French Fama to 1920s).  

Average 3 year nominal returns when buying a sector down since 1920s:

60% = 57%

70% = 87%

80% = 172%

90% = 240%


Average 3 year nominal returns when buying an industry down since 1920s:

60% = 71%

70% = 96%

80% = 136%

90% = 115%


Average 3 year nominal returns when buying a country down since 1970s:

60% = 107%

70% = 116%

80% = 118%

90% = 156%


It’s hard to buy something down 80%, especially if you owned it when it was down 30, 50, then 80%.  But usually that is a great time to be wading in…Some recent examples of assets that have gotten clobbered include tech in 2002, homebuilders in 2009, and Greece and (Junior) Gold Miners now.  

Lessons Learned on Publishing an eBook (Also, Book Now Free for Amazon Prime Members)

After a month or so of having self published our first book, a few takeaways.  

1 – The most important is that, while expected, the vast majority of sales (90%) came through Amazon.  Realizing this, we are now moving the eBook exclusively to Amazon so that Prime Members can download the book for free (see below).

2 – The biggest complaint about the book is that it is short (about 60 normal pages).  This is funny since I literally spent months editing it down to that length.  I hate books being long for the sake of being long, but it seems like lots of people still equate length with value.  My first book was $50, and to reflect the shorter length of this one I reduced the price to $5, or roughly the cost of a latte.  But, people still complain that it is too short.

Along the same lines is the problem of producing a lot of free content.  Once you do this, people begin to expect it.  I have received a number of emails stating they thought the book should have been a free white paper (to which I offer to refund their $4.99).  Investors have no problems paying for loads and high fees often in the tens of thousands of dollars, but $5 for an eBook, the horror!

3 – The third takeaway is that lots of people still love physical books (myself included).  We uploaded a large CreateSpace book so that people can get the physical book for about $7.  I was shocked at how good it came out after having seen early CreateSpace books years ago – the quality is much improved.


How to Borrow a Book on Amazon for Free

You can borrow one book from the Kindle Owners’ Lending Library each calendar month. You can deliver the book to other Kindle devices registered to your Amazon account.
    1.  From your device, open the Kindle Store.


    1.  Select All Categories, and then select Kindle Owners’ Lending Library.Eligible titles display the Prime badge.


    1.  When you’ve made your selection, select Borrow for Free.You can borrow only one book at a time. If you’ve already borrowed a book, you’ll be prompted to return it before you can borrow a different book.
      Note: Available titles may change each calendar month.


If your Amazon Prime account is disabled after you borrow a book, you will lose access to the book you borrowed.Your bookmarks, notes, and highlights within the book will be saved to your Amazon account. They are available if you borrow or purchase the book later.


The Risks in Risk Parity

There’s been lots of noise about Ray Dalio’s All Weather fund’s losses this year, but this really should come as no surprise to investors and readers of this blog. An environment of declining values in foreign equities, commodities, real estate, and bonds results it poor performance for buy and hold and risk parity funds especially. 

I’ve done a bunch of posts on risk parity here on the blog over the years, and even a few presentations I recorded from speeches in years past (Dynamic Risk Parity Part I & Dynamic Risk Parity Part II).  While talking about risk parity is like talking religion or politics, you can design a simple risk parity allocation with something like:

15% Stocks (Large cap, small cap, foreign developed, foreign emerging)

70% Bonds (US Gov, Corporates)

15% Real Assets (Commodities and Gold, REITs)

This would then need to be leveraged about 1.5X to get to similar volatility as a 60/40 portfolio.

Historically this has added about 200 bps over a simple 60/40 portfolio for similar vol and drawdowns.  Anyways, please watch the videos for a much deeper look into the strategies with historical performance, etc.

Below are a few public risk parity mutual funds – all are expensive with fees over 1% for a simple buy and hold portfolio that one could replicate with ETFs quite easily.  Global X has had a Risk Parity ETF filed for awhile but I imagine it has been held up at the SEC due to the need to use futures/leverage.  

Salient Risk Parity SRPAX 

AQR Risk Parity AQRNX

RPG Risk Parity DRPAX

Putnam Dynamic Risk Allocation PDREX

Invesco Balanced-Risk Allocation ABRYX


Research Updates (CAPE)

We will be doing our quarterly CAPE updates on The Idea Farm next week at quarter end.  


Some other great research we’ve highlighted on The Idea Farm recently:

  • The Trillion Dollar Mistake with John Del Vecchio

  • Risk Parity and Quality with CXO

  • The 7:00′s Report

  • The Time for the Money with Morgan Creek

  • 5 New Asset Classes with SocGen

  • Macro Updates with Cornerstone

  • Inflation expectations and commodities with Guggenheim

  • Cantor on Kamikaze QE

  • McClellan on copper inventories, and the Hindenburg Omen and Titanic Syndrome

  • Fundamental improvements with Janiczek

  • Graham & Doddsville with Columbia

  • Low variance, US $, and Japanese stocks 

  • and early look at the updated GTAA paper update and free Shareholder Yield book.


Make sure you subscribe so you don’t miss any issues!

Monthly Subscription ($19/month)

Annual Subscription ($195/year )

Dads Love Dividends

Happy Father’s Day to all the dads out there…I’m fishing with mine in Alaska!  Pic below of us in Denali before heading out on the water down near Ninilchik.  

If you input your (or Dad’s) email here, I’ll send him a free ebook to read on dividends.

Since my old man grew up in Nebraska on a farm, and loves popcorn, I got him an assortment of heirloom popcorn from the midwest…

PS It looks like you can buy our book now as a paperback, in full color here.



QTAA Update: Conclustions and FAQs

Below we have updated our 2006 white paper.  While you can download the full 70+ page paper here, I’ve also chopped it up into a series of more digestible posts for the blog.  

The purpose in this paper was to create a simple-to-follow method for managing risk in a single asset class and, by extension, a portfolio of assets.  A non-discretionary, trend-following model acts as a risk-reduction technique with no adverse impact on return.  Utilizing a monthly system since 1973, an investor would have been able to increase risk-adjusted returns by diversifying portfolio assets and employing a market-timing solution.  In addition, the investor would have also been able to sidestep many of the protracted bear markets in various asset classes.  Avoiding these massive losses would have resulted in equity-like returns with bond-like volatility and drawdown.  Investors looking to tailor their portfolio may consider using alternate cash strategies, more assets in the portfolio, and alternative weighting schemes to find a portfolio that is right for them.


Below is a compilation of frequently asked questions we receive on a regular basis about the broad global tactical strategies presented in our book and white papers.  While we cannot speak specifically to how we manage money, we can speak broadly to the strategies in this paper.

We try to be as open and honest about the benefits as well as the drawbacks of every strategy and approach we research.

Of utmost importance is finding an asset management program and process that is right for you.

Where did you get your historical data?  Can you send it to me?

We used Global Financial Data and our agreement does not allow us to share the data.  However, there are many free sources of data available including this post we did on a list of free data sources.

How do you update this model?  What do you mean by “monthly price”?

The model, as published, is only updated once a month on the last day of the month.  Market action in the meantime is ignored.  The published model was only meant to be broadly representative of the performance one could expect from such a simple system.

Have you examined an all-in version where you invest 100% of the assets in whatever asset classes are on a buy signal?

Yes, but this eliminates the benefits of diversification and exposes the portfolio to large risks when only a few asset classes are on a buy signal.  In addition, it introduces unnecessary transaction costs.  Returns are higher but with an unnecessary increase in risk.  Investors seeking higher returns can use leverage or employ some of the rotation techniques mentioned in this paper.

Do you rebalance the asset classes monthly?

Yes.  Although we show in the book The Ivy Portfolio that it is important to rebalance sometime, the frequency is not that important.  For buy and hold allocations we recommend a yearly rebalance in tax-exempt accounts, and rebalancing based on cash flows in taxable accounts.  Percentage tolerance bands are another option for rebalancing decisions.

Have you tried various moving averages?

Yes.  There is broad parameter stability from 3 months on out to over 12 months. 

I like the strategy and want to implement it, should I wait until the next rebalance?

We usually invest immediately at the rebalance point.  While this can have a significant effect on short-term results, it should be a wash in the long term.  Investors worried about the short term can stagger their purchases over a number of months or quarters.

Where can I track the strategy?

You can track the strategy on a number of websites including  We also have a tracking feature on the blog.

What about using daily or weekly data?  Doesn’t only updating monthly expose an investor to dramatic price movements in the interim?

We have seen confirming data for various timeframes, some superior, and some inferior.  The question is valid – but also consider the opposite scenario.  What happens to a system that updates daily where a market goes down fast, then reverses and goes straight back up?  The investor would have been whipsawed and lost capital.  We expect the timeframes to have similar performance over the long term.

What is the best way for an individual to implement the leveraged model?

This is tricky.  If your broker has reasonable margin rates then leverage is justified.  Interactive Brokers is consistently fair here. For investors familiar with the product, futures are a good choice. One can also use an all-in cross-market rotation system detailed in the paper.

Why are you taking credit for using the 200-day moving average model?

We’re not, and we are very upfront that trendfollowing models have been around for over 100 years.

For the rotation system you’ve written about where you purchase the top performer over the past 1, 3, 6, 12 month periods, are you simply using the mean of the 1, 3, 6, 12 month performance to calculate the top performer?


Is the 10-month SMA crossover optimized for all (five) asset classes, or is it possible that different timeframes could work better for different asset classes?

Different timeframes will certainly work better (in the past), but what is unknown is the parameter that will work best in the future.  However, there is broad parameter stability across many different moving average lengths.

Have you ever tried adding gold to your model (or any other asset class)?

Yes, we use over 50 asset classes at Cambria – the paper is meant to be instructive.

Why did you choose the 10-month SMA?

Just to be representative of the strategy, and it also corresponds closest to the 200 day moving average. We chose monthly since daily data does not go back that far for many of the asset classes.

What software did you use to perform the historical backtests?


I am trying to replicate your results with X (Yahoo, Google, etc.) database and my results don’t match.  What gives?

The indexes disclosed in the paper and book are obtained from Global Financial Data.  We cannot fact check all of the data sources to see how they calculate their numbers but make certain that the numbers are total return including dividends and income.  For Yahoo Finance one needs to use the adjusted numbers – AND make sure to adjust them every month (or record the new returns for that month), a tedious process.

How is your ETF different then the model you presented in the white paper and book?

We cannot address questions about our funds here.  Feel free to email us or visit the fund information page here:

Why the expansion from five to more asset classes?  Have you tested this increased granularity?

Yes we have performed extensive research in house that demonstrates that increasing the number of asset classes (and sub asset classes and industries) that are not perfectly correlated improves risk-adjusted performance.  You can find a brief post here on our blog.

What is the long term expected volatility and drawdown targets?  Is 10% maximum drawdown for the GTAA Moderate strategy reasonable?

While the historical volatility (7%) and maximum drawdown (-10%) are good targets, by definition a portfolios largest drawdown is always in the future.  We foresee the possibility of a 20% drawdown as a possible scenario.

How will trend-following asset allocation perform in sideways markets?

In general, a market that oscillates can be a poor market for trendfollowers do to whipsaws.  However, one that examines Japan – a market that has had very poor performance for the past 20 years – would find that a trendfollowing approach would have still added significant value.

What do you anticipate the long-term correlation of this strategy to be, with the S&P 500?

This is a difficult question to answer since correlations are inherently unstable.  However, since most of the portfolio is in equity-like assets we expect the correlation to be quite positive.  Historically the correlation has been around 0.7 with buy and hold and 0.5 with the S&P 500.

In your opinion, is this strategy diversified enough for an investor to have a large % of his assets in it?

The strategy is designed as a core holding and an “all-weather” portfolio designed to perform in any market environment.  The fund’s underlying holdings represent over 20,000 securities across the globe.

I can see using the strategy as a core holding, however, because it can hypothetically have a significant equity exposure, what is the largest allocation you would give it in a conservative account? 25%?

That depends entirely on the investor and their risk and return objectives.  The fund is targeting equity like returns with reduced risk, and depending on the investor that is appropriate for a 0% to 100% allocation.

It doesn’t look like it benefits the portfolio much to time the bond portion, thoughts?

Trading lower volatility bonds doesn’t have much of a benefit, but timing higher volatility bonds (junk, emerging, corporate) tends to work well.

Really Bad Months

Last month saw most asset classes decline, with the exception of US equities.  I thought I would put the declines in perspective – the below is since 1972 for the following main asset classes.

Most equity like assets have had worst months of over -20%.  Bonds, 7-15%.  Can you fathom that?

An old post on what to do after really bad months here.


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