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Hedged Bridesmaid strategy

I read somewhere a vaguely described "Bridesmaid Strategy" in which you go long the second-best performing sector ETF of the previous year and supposedly that reliably beats SPY. It's a bunch of crap. It is not at all a reliable indicator. Depending on how you time the rebalance and the calculation it either just barely beats SPY or significantly underperforms, and generally exhibits quite a bit more volatility than SPY.

While messing around with the code though, I tried shorting the best performer as a hedge against market fluctuations. It seems the best performer has a tendency to mean revert while the second-best has a tendency to out-perform. Together they even out market volatility. So here's my hedged-variation on the Bridesmaid Strategy.

I think the problem with strategies like this that are based on general prior observations is that they are in their essence over-fit. It might continue to perform in the future... or it might not.

Clone Algorithm
35
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Backtest from to with initial capital
Total Returns
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Alpha
--
Beta
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Sharpe
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Sortino
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Max Drawdown
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Benchmark Returns
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Volatility
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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
# Backtest ID: 597a2b6130b93d51e6eeef3f
There was a runtime error.
3 responses

Here's a longer-timeframe, using TLT as the benchmark. Almost similar returns as TLT with significantly less volatility. Might be useful as a "risk-free" cash substitute?

Clone Algorithm
35
Loading...
Backtest from to with initial capital
Total Returns
--
Alpha
--
Beta
--
Sharpe
--
Sortino
--
Max Drawdown
--
Benchmark Returns
--
Volatility
--
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
# Backtest ID: 597bc95a614d25547e231afd
There was a runtime error.

I find this phenomenon incredibly amusing. It doesn't beat the market, but it works. Thanks for sharing.

It's continued to work since I posted it... but there's no reason why it couldn't fail in the future.

Also be aware that they're changing the sector categorizations next year: http://www.etf.com/sections/features-and-news/seismic-sector-shift-shake-30-etfs?nopaging=1