Sector/Asset Rotation is a Long/Short Cash Neutral ETF based portfolio consisting of highly liquid ETFs which represent all major sectors in the US, Fixed Income, and Commodities. The portfolio is leveraged at 2X due to its inherit low volatility.
The portfolio's goal is to generate positive returns in any market regime while maintaining low exposure against large drawdowns and market volatility.
The Sector/Asset Rotation portfolio is predicated on the notion that markets naturally flows between sectors and asset classes. The idea is to move cash between long and short holdings in order to exploit the differential while maintaining minimum exposure to sudden market surprise.
The portfolio consists of 18 ETFs each representing 100's of stocks.
The portfolio is re-optimized monthly between its long and short positions for maximum return while forced to keep the net exposure at 0 (50% Long and 50% Short).
Here is how the Model Portfolio is traded:
The portfolio relies on Markowitz's Nobel price winning MVO, mean variance optimization and a regression based price forecaster using K nearest neighbor or Knn.
Every four weeks, the system seeks to identify which ETFs are set to outperform or underperform. The optimizer then attempts to allocate 100% of its buying power between its long/short constituents for Max Return (targeting the top right edge of the efficient frontier).
In addition, to minimize the impact of changes in market regime in between optimization schedules, the portfolio employs strict trailing stop loss conditions.
It is not uncharacteristic to witness over 50% of the transactions closing due to stop loss conditions. While the remaining positions in the portfolio continue to generate returns perpetually.
Transaction cost and slippage are considered.
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