Tag Archives: halloween

SilverPepper Posts Pair Of First-Place Finishes

Alternative mutual fund company SilverPepper prides itself on making “hedge fund strategies” available to “the rest of us.” The Lake Forest, Illinois-based firm has a number of investor-friendly videos at its website , and its marketing materials generally aim to entertain as well as inform. SilverPepper’s approach is working. The firm recently celebrated its second anniversary, and for the second straight year, two of its mutual funds had the honor of finishing first within their categories: the SilverPepper Merger Arbitrage Fund (MUTF: SPAIX ) was the top-performing merger-arbitrage mutual fund for the 12 months ending October 31, and the SilverPepper Commodity Strategies Global Macro Fund (MUTF: SPCIX ) finished first out of 157 funds in the “Commodities Broad Basket” Morningstar category. SPAIX also had a strong showing in comparison to funds in the broader Market Neutral category, finishing 11th out of 158 funds for the time period being considered. For the year ending December 31, 2015, the fund returned an impressive 8.49%, ranking in the top 3% of the broad category. SilverPepper president Patrick Reinkemeyer attributed the fund’s outperformance to “hedge fund expert” Steve Gerbel, who “controlled risk by avoiding failed mergers” and boosted returns by investing in smaller-cap companies “where regulatory hurdles tend to be less, yet merger spreads are typically wider.” SPCIX finished 1st out of 157 funds for the year ending Halloween 2015, but that doesn’t mean it actually generated positive returns for what was a tough 12 months for commodities. Nevertheless, it outperformed the category average by a whopping 14 percentage points, and over the next three months, its -0.80% return remained in the top 4% of the category. Mr. Reinkemeyer said fund manager Renee Haugerud “deserves credit” for “using her fingernails-in-the-dirt research to largely avoid some of the worst commodity sectors,” including oil, and “hedging its bets” as part of “an overt tactic to protect investors’ assets.” For more information, visit silverpepperfunds.com. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

Market Neutral Funds: The Best And Worst Of October

By DailyAlts Staff Morningstar’s aggregated Market Neutral category returned +0.67% in October, besting September’s returns of +0.12%. Invesco’s All Cap Market Neutral Fund (MUTF: CPNAX ) was the category’s top performer for an impressive second-straight month, adding 3.03% gains in October to the prior month’s +7.03%. But, while the top funds generally posted lighter gains in October than they did in September, the worst performers sustained even steeper losses. (click to enlarge) Top Performing Funds in October As stated above, the Invesco All Cap Market Neutral Fund was the Market Neutral category’s top performer for the second straight month. Through October 31, the fund had year-to-date returns of +10.88%, and even more impressive three-month and one-year gains of 13.42% and 11.40%, respectively. The fund, which debuted in December of 2013 and has $35 million in assets under management (“AUM”), is available in A (CPNAX), C (MUTF: CPNCX ), R (MUTF: CPNRX ), and Y (MUTF: CPNYX ) shares. The other top performers last month were the Nuveen Equity Market Neutral Fund (MUTF: NIMEX ) and the Zacks Market Neutral Fund (MUTF: ZMNAX ), which posted respective one-month gains of 2.72% and 2.58%. NIMEX, which debuted in June of 2013 and has $55.7 million AUM, had one-year returns of +2.97% through October 31. ZMNAX, which has been around since July 2008 but has just $9.8 million in AUM, was up 7.67% for the year ending on Halloween, ranking in the top 8% of the Morningstar category. All three of October’s top performers had positive returns over the past one, three, ten, and twelve months ending October 31. The Zacks Market Neutral Fund also had positive returns over the past three and five years ending October 31, as well. (click to enlarge) Worst Performing Funds in October The Hussman Strategic Growth Fund (MUTF: HSGFX ) was October’s very worst market-neutral fund to own, losing 6.53%. This is quite a bit worse than last month’s biggest loser, the Castlerigg Event Driven and Arbitrage Fund (MUTF: EVNTX ), which fell just 4.72% in September. HSGFX was down 9.58% for the year ending on October 31. The fund has been around since 2005, producing annualized three- and five-year losses of 7.96% and 7.93%, respectively, though the end of October. The fund has a one-star “negative” rating from Morningstar. The PSI All Asset Fund (MUTF: FXMAX ) and the BlackRock Emerging Market Long/Short Equity Fund (MUTF: BLSIX ) were the next worst performers in October, posting respective losses of 4.77% and 3.01% for the month. FXMAX launched in 2010 and has gone on to generate negative returns across the one-, three-, and ten-month periods ending October 31, in addition to three- and five-year annualized returns of -6.05% and -5.14%, respectively. BLSIX launched in 2011 and also has negative returns across all of Morningstar’s default time frames, including respective one- and three-year annualized losses of 7.01% and 2.54% for the periods ending October 31. (click to enlarge) September’s Best and Worst: Follow-Up Invesco’s All Cap Market Neutral Fund held on to its crown as the best-performing market-neutral fund for a second straight month, but what happened to September’s other top performers? The AQR Equity Market Neutral Fund (MUTF: QMNIX ), which posted a 5.79% gain in September, added just 0.09% in October, ranking in the bottom 38% of the category despite the modest gains. The Vanguard Market Neutral Fund (MUTF: VMNIX ), which returned +5.11% in September, lost 0.85% in October, putting it in the bottom 15% of all market-neutral funds for the month. And what about September’s worst performers? The previously mentioned Castlerigg Event Driven and Arbitrage Fund lost 4.72% in September, but bounced back (a bit) with a 0.62% gain in October. September’s other bottom-three funds in the category – the Visium Event Driven Fund (MUTF: VIDIX ) and the Arbitrage Event-Driven Fund (MUTF: AEDNX ) – which posted respective declines of 4.70% and 3.73% in September, improved with returns of +0.11% and +0.55% in October. Past performance does not necessarily predict future results. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

And The Winner Is…

Until recently, the longest back test using stock market data was Geczy and Samonov’s 2012 study of relative strength momentum called “212 Years of Price Momentum: The World’s Longest Backtest: 1801-2012”. The length of that study has now been exceeded by an 800 year backtest of trend following absolute momentum in Greyserman and Kaminski’s new book, Trend Following with Managed Futures: The Search for Crisis Alpha . The authors looked at 84 equities, fixed income, commodities, and currencies markets as they became available from the years 1200 through 2013. They established long or short equal risk sized positions based on whether prices were above or below their 12-month rolling returns. The annual return of this strategy was 13% with an annual volatility of 11% and a Sharpe ratio of 1.16. Anyone who had doubts about the long-run efficacy of trend following momentum should no longer be doubtful. However, let’s not just look at trend following on its own. Let’s also compare it to other possible risk reducing or return enhancing approaches and see what looks best. We will base our comparisons on the performance of U.S. equities because that is where long-run risk premium and total return have been the highest. We also have U.S. stock market data available from the Kenneth French data library all the way back to July 1926. We will compare trend following to seasonality and then to the style and factor-based approaches of value, growth, large cap, and small cap. We will also see if it makes sense to combine these with trend following. For seasonality, we look at the Halloween effect, sometimes called “Sell in May and go away…” This has been known to practitioners for many years. There have also been a handful of academic papers documenting the positive results of holding U.S. stocks only from November through April. The following table shows the results of this strategy compared with absolute momentum applied to the broad U.S. stock market from May 1927 through December 2014. With 10-month absolute momentum, we are long stocks when the excess return (total return less the Treasury bill rate) over the past 10 months has been positive.[1] Otherwise, we hold Treasury bills. We also hold Treasury bills when we are out of U.S. stocks according to the Halloween effect (in stocks November-April, out of stocks May-October). We see that the 6-month seasonal filter of U.S. stock market returns substantially reduces volatility and maximum drawdown, but at the cost of reducing annual returns by over 200 basis points. Trend following absolute momentum, on the other hand, gives a greater reduction in maximum drawdown than seasonality with almost no reduction in return. There is no reason to consider seasonal filtering when absolute momentum gives a greater reduction in risk without diminished returns. The table below shows the U.S. market separated into the top and bottom 30% based on book-to-market (value/growth) and market capitalization (small/large). We see that value and small cap stocks have the highest returns but also the highest volatility and largest maximum drawdowns. Style US Mkt Value Growth Large Small Annual Return 11.8 16.2 11.3 11.5 16.6 Annual Std Dev 18.7 25.1 18.7 18.1 29.3 Annual Sharpe 0.42 0.46 0.39 0.42 0.41 Maximum DD -83.7 -88.2 -81.7 -82.9 -90.4 Most academic studies ignore tail risk/maximum drawdown, but these can be very important to investors. Not many would be comfortable with 90% drawdowns.[2] On a risk-adjusted basis (Sharpe ratio), neither small cap nor value stocks appear much better than growth or large cap stocks. This is consistent with the latest academic research showing no small size premium and a value premium associated only with micro cap stocks.[3] Let’s now see what happens now when we apply absolute momentum to these market style segments: Style w/Absolute Momentum AbsMom ValAbsMom GroAbsMom LgAbsMom SmAbsMom Annual Return 11.5 13.3 10.3 11.5 13.9 Annual Std Dev 12.9 17.2 13.3 12.5 21.1 Annual Sharpe 0.58 0.53 0.48 0.60 0.46 Maximum DD -41.4 -66.8 -42.3 -36.2 -76.9 In every case, adding absolute momentum reduces volatility, increases the Sharpe ratio, and substantially lowers maximum drawdown. The biggest impact of absolute momentum, however, is on large cap stocks, followed by the overall market index. The use of a trend following absolute momentum overlay further reduces the relative appeal of value or small cap stocks. We may wonder why large cap stocks respond better to trend following. The answer lies in a study by Lo and MacKinlay (1990) showing that portfolio returns are strongly positively autocorrelated (trend following), and that the returns of large cap stocks almost always lead the returns of small cap stocks. Since trend following lags behind turns in the market, investment results should be better if you can minimize that lag by being in the segment of the market that is most responsive to changes in trend. That segment is large cap stocks, notably the S&P 500 index, since they lead the rest of the market. In my book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk , I give readers an easy-to-use, powerful strategy incorporating relative strength momentum to select between U.S. and non-U.S. stocks and absolute momentum to choose between stocks or bonds. I call this model Global Equities Momentum (GEM). And what index is the cornerstone of GEM? It’s the S&P 500, the one most responsive to trend following absolute momentum and that gives the best risk-adjusted results. Einstein said you should keep things as simple as possible, but no simpler. One can always create more complicated models or include more investable assets. But as we see here, trend following momentum is best when it is simply applied to large cap stocks. [1] We use 10-month absolute momentum instead of the more popular 10-month moving average because absolute momentum gives better results. See our last blog post, ” Absolute Momentum Revisited “. [2] The next largest maximum drawdown was 64.8 for value and 69.1 for small cap on a month-end basis. Intramonth drawdowns would have been higher. [3] See Israel and Moskowitz (2012) for empirical results. Delisting bias and high transaction costs can also reduce any small cap premium. Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Please see our Disclaimer page for more information.