Investors and particularly quantitative traders are constantly looking for the best and most optimum strategies to beat market benchmarks. Passive investors know that 90% of actively managed funds underperform their reference indexes, therefore they choose simple index tracking exchange traded funds (ETF’s). As we know, we are greedy from our nature and keep looking for opportunities to make more money. We guess that’s how the new class of passive investments emerged, called smart beta.
Smart beta ETFs follow proprietary indexes which are meant to outsmart the markets. One of the investment ETF strategies which so far has managed to raise almost $100 million since its launch in May 2012, is the AlphaClone Alternative Alpha ETF (AMEX: $ALFA).
According to the factsheet, the index which replicates the fund uses AlphaClone’s proprietary “Clone Score” methodology to aggregate on a quarterly basis the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures.
The index also employs a hedge mechanism that allows the index to vary from being long only to market hedged. The hedge is triggered on (off) when the S&P 500 closes below (above) its 200 day simple moving average at any month end.
When the index is hedged, it remains long its holdings and shorts the S&P 500 index in an amount equal to the index’s long positions on the day the hedge takes effect.
The strategy which follows the $ALFA ETF works well during long-term trends (preferably steep) when the S&P 500 Index remains above or below its 200 day moving average. When the U.S. market starts trading side-ways crossing the 200 day moving average from above to below and from below to above the AlphaClone strategy starts losing its momentum delivering considerable loses as shown on the chart attached below, starting from the mid-August 2015.
In our opinion, the bottom line is the strategy based on trading in relation to the 200 day moving average is good for trend-followers who have very strong conviction in long-term and steep trends of particular asset classes.
As per the AlphaClone strategy, we can see that since its launch it had been performing fairly well until mid-August 2015 when it suddenly stopped working due to the trendless U.S. stock market direction.
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