We had a timely piece on "Avoiding the Big Drawdown," launched August 13--a few business days before the recent market chaos.
Our approach to avoiding massive drawdowns is to focus on simple timing rules: absolute and trending asset class metrics. Our analysis of the downside protection model (DPM), applied on various market indices, indicates there is a possibility of lowering maximum drawdown risk, while also offering a chance to participate in the upside associated with a given asset class. We make no claims that this is the "best" or the most "complex" system out there. In fact, we don't want the "best or most complex" timing model--we want a simple, non-optimized, robust timing model that doesn't work all the time. If models work all the time, they won't work in the future. God I hate market efficiency.
Of course, claims of potential high returns with lower risk should always be scrutinized. To explore our concept further, we hooked up with James Christopher of Quantopian, outlined the nuts and bolts of our downside protection model, and told him to conduct his own experiment. James' analysis and results will surprise you. Interestingly enough, we are in the middle of a live "out of sample" test to determine if the DPM model can help us avoid the big drawdown. Only time will tell...(YTD results attached, thanks to James)
If you'd like to explore more of our asset allocation research concepts/ideas, here is a list of posts we've done on asset allocation. We'd love to see Quantopians reverse engineer and tear up these ideas...
Always in search of the truth!
Wesley R. Gray, PhD
CEO/CIO Alpha Architect
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