I thought I would summarize a few ideas mentioned on World Beta over the past few months as potential trading ideas based on some simple quant research.
1. Follow a simple tactical asset allocation model. With returns near flat the model performed admirably in 2008 – look for an update to the white paper with out-of-sample numbers sometime in late January. The model is currently 100% in cash/bonds.
2. Look for a particularly pronounced January Effect in beaten down microcaps. I found that following the worst 10 years in stocks since 1927, the average return for microcaps in January was around 18% with no down years. An investor could either go long microcaps outright or created a hedged position by shorting large caps. Sample small and microcap funds are PZI, FDM, and IWC. Large cap ETFs include SPY and VTI. I mentioned a screen for beaten down microcaps here.
3. Look for a bounce across the board in January. In one study I examined asset class performance after a really bad month and the take-aways from this study were:
– It does not pay to buy an asset class after a really bad month for the following 1 month.
– 12 months later the return is not much different than average.
– 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.
4. Follow the smart money. A simple method of following the most popular stock holdings of the Tiger Cubs would have beaten the market by 12% a year since 2000. Current holdings include:
America Movil (AMX)
Snadridge Energy (SD)
SBA Communications (SBAC)
American Tower (AMT)
XTO Energy (XTO)
AlphaClone lets you create an custom group of managers (and while I am biased it is a lot of fun to play around with the software). In a future post I will take a look at the Hedge Fund Consensus and Hedge Fund Best Ideas Portfolios that would have outperform the market substantially over the past 8 years.
5. Get long Japan. Japan is back to where they were in 1982, and have experienced three down years in a row – a setup that generates large returns of around 20-30% historically.
I am sure there are some more I missed, but I will take a look when I get back to the US.
Happy New Years!