The process begins by understanding the risk/reward environment from our framework and applying a set of rules based on the value of the factors in the framework. Priority is given to fundamentals such as valuation, with secondary adjustments based on market internals.
Three Risk/Reward Environments
We observe three types of risk/reward environments and adjust our equity exposure to match the current environment.
- Establish upper and lower Exposure Limits based on the fundamentals.
- Determine an appropriate Base Allocation based on the fundamentals.
- Tilt the Base Allocation for market internal and environmental conditions.
Three Month Focus
- The model dynamically adjusts exposure to the S&P 500 based upon the expected risk-adjusted returns for the next three months.
- Three-month horizon allows us to adapt to changing market conditions without generating excessive portfolio turnover.
Performance - Historical Backtest
The following chart shows the hypothetical implementation of the strategy, which permits long exposure up to 200% and short exposure up to -100% versus a passive buy and hold strategy.
The year-by-year comparison provides a better picture of how the strategy compares to the passive S&P strategy in years when the market is up versus years when the market is down.
Backtested results have been generated with the benefit of hindsight. There can be no assurance that similar results will be obtained in the future.
We benchmark the product against the S&P 500 and also a relatively new tactical ETF offering a strategy with a similar objective, The Hull Tactical US ETF, ticker symbol HTUS. Our Factsheet provides monthly live returns compared to both of these benchmarks.