The idea here is a simple implementation of the "All Seasons" portfolio from Tony Robbin's "MONEY Master the Game: 7 Simple Steps to Financial Freedom", based on his interview with Ray Dalio of Bridgewater Associates, an enormous hedge fund. There's nothing particularly new in the book, since Bridgewater have talked about their "All Weather" strategy for years, but I thought it was great how Tony put it his "you can do it too" perspective on it.
I've used ETFs that mirror the performance of stocks, bonds and real assets, but with "leverage" to make the returns more interesting. I put leverage in quotes, because nothing is actually leveraged; it uses more volatile instruments than is traditional, but it comes to much the same thing as increasing leverage.
The strategy holds EDV, XIV and GLD ETFs in proportion to roughly equalise their volatility (in the ratio 40-40-20). It uses fixed weights for simplicity.
EDV is extended duration US treasury fund, which behaves very much like leveraged treasury bonds (like TLT). I use it to raise the volatility of the treasuries to match the other assets, without using too much of the dollar value of the portfolio.
XIV is an ETF which shorts volatility futures, essentially selling insurance to holders of S&P500. It behaves very much like a highly leveraged version of SPY, but with added return from volatility futures contango (which it shorts). I use it to give a nice slug of volatility to equities without using too much of the dollar value of the portfolio. Note, XIV doesn't like volatile sideways markets for S&P500, like 2015, which cause the insurance to pay out often. With hindsight, we'd have been better holding SPXL (3xlevered SPY) for a flat year in our world of leveraged equities, but I think on the whole it's a great instrument (in the same way that its inverse, VXX, seems like a terrible instrument).
GLD is just the return from physical gold, just sitting in storage, waiting for the next financial crisis. It "protects" the rest of the portfolio from "suprise" inflation, which normally hammers stocks and bonds.
It rebalances quarterly, partly to save a bit of cash on fees, and partly because somewhat infrequent rebalancing should give a slight momentum benefit, without exposing the portfolio to too much concentration risk.
I've started the algorithm from 30th November 2010, as this is the inception of XIV. I have some simulated data for XIV in Excel going back to 26th March 2004, and further back using leveraged S&P500 if you are interested.
This algo is based on one generated by the Quantopian Algorithm Builder, with minor tweaks.
It's not exactly a complicated strategy, but a good learning exercise for me, and I thought some might find it productive. Some of my pension is in this strategy, and I'm considering automating the rebalancing with Quantopian.
|Returns||1 Month||3 Month||6 Month||12 Month|
|Alpha||1 Month||3 Month||6 Month||12 Month|
|Beta||1 Month||3 Month||6 Month||12 Month|
|Sharpe||1 Month||3 Month||6 Month||12 Month|
|Sortino||1 Month||3 Month||6 Month||12 Month|
|Volatility||1 Month||3 Month||6 Month||12 Month|
|Max Drawdown||1 Month||3 Month||6 Month||12 Month|