World Beta: Combining Value and Momentum Approaches

This is a really interesting semi-annual report from Hussman.  In it he shows the returns of his main fund, both hedged and unhedged.  The take-aways are that a) his stock picking has added a lot of value over the broad indexes and b) the hedging has added value, not on an absolute level, but a lot on a risk adjusted level by reducing volatility and drawdowns over the past decade.  Click on chart to enlarge.

We have presented a lot of hedging ideas over time, the main one being a momentum, or trend, based system (A Quantitative Approach To Tactical Asset Allocation).  Most of the results of a moving average system have similar properties in that the they do not increase absolute return over buy and hold, but rather reduce volatility and drawdown. (One can use other methods such as momentum/relative strength and or leverage to increase absolute returns like Relative Strength Strategies for Investing.)

Hussman’s fund is interesting, as it essentially increases equity exposure as valuations come down, and decreases exposure or hedges as valuations increase.  Reminds me a lot of GMO.  So in some ways it is a bit of a dynamic short volatility fund based on valuation (I know not quite the right description but works for purposes of this post).  Here is an older post we did on hedging using CAPE, and found that a simple method of investing when the CAPE was less than average generates equity returns with less risk and drawdown.

Anyways, I think it is instructive to demonstrate how pairing a fund like this with a long volatility strategy would have worked since inception.  So, I’m going to include the GTAA strategy from my paper here, only using the hypothetical 5 asset classes and the 10-month simple moving average.  I’m also going to lop off a very conservative 2.0% for fund expenses,  trading friction, etc.

To see the strategy and the returns, go here.