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Lazy-Person's Long-Short Strategy for Robinhood (1.4 sharpe)

I was looking into these hedge fund-style ETFs that employ various different long-short strategies. The results they're delivering are pitiful -- uniformly low to negative alpha; sometimes +1 beta; some have a ton of volatility; most lose money during market downturns. I don't even understand why these exist!

Anyways, I picked out what looked to be the worthwhile ones of these strategy ETFs and wrote up an algo that brings the beta down and maximizes the alpha.

Since Robinhood doesn't support shorting I figure this could be useful to somebody on Robinhood looking for exposure to a positive alpha+low beta+low risk strategy.

Also, since sometimes people write strategies where they switch to bonds depending on market conditions, this could be used as an alternative to something like IEI -- it has typically better returns. Though you might run into liquidity issues with high capital since these ETFs are fairly low volume.

If anybody has a better rebalancing/weighting strategy feel free to fix it and post yours.

Clone Algorithm
53
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Backtest from to with initial capital
Total Returns
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Alpha
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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: 5987d8afb2cd244fd1123b47
There was a runtime error.
8 responses

Really nice and simple. Start your own ETF!

Hi, not bad, you chose well. Could you please post a short list of these hedge fund-style ETFs that dont't work just to make a comparison?

I got the list of hedge fund-style ETFs from here:
http://etfdb.com/etfdb-category/hedge-fund/
Here's a list of actively managed bond ETFs (I used a list I found somewhere else, but this one is more complete):
https://www.thebalance.com/actively-managed-bond-etfs-the-complete-updated-list-416942

So I just threw this together as a proof of concept. It definitely needs improvements before live trading.

One problem is that I manually weeded out the ETFs that had negative alpha or super high beta. I think ideally you'd have them all in there and have the algorithm dynamically weed out the ones that don't fit criteria. Since so many of these ETFs were only recently released, there wasn't enough out-of-sample data to do that properly. So even though I did use a small time sample (a few months in 2017) to do this weeding out, I introduced quite a bit of lookahead bias by doing that. The algo performs best during and around my in-sample, and the results are terrible during 2015 -- so a 1/3rd of the time it's failing. Not so good. A back test all the way to 2007 did produce 1.0+ sharpe, but as I pointed out, most of these ETFs are so recent, that historical data is irrelevant. It'll be fun to see the next 6 months to a year if it fails or not. Due to the mean-reversion weighting it could start putting an emphasis on perpetual losers if their behavior changes and they start consistently failing. Equal weighting might be safer even though it won't deliver as great results.

Again, it needs to be a bit more rigorously reconfigured before it's ready for live trading, but as a starting point I think it's nonetheless already safer than investing in any single of the underlying ETFs from that list.

Hi Viridian Hawk,

That is a very interested strategy especially given that fact that you have near zero beta with a long only portfolio. Are some of the ETFs negatively correlated?

Best regards,
Aqua Rooster

Aqua,

So yeah, basically the algorithm is going long a bunch of ETFs that internally employ long/short strategies. The hedge fund ETFs I selected exhibit between 0 and 0.3 beta, and the actively managed bond ETFs probably have negative beta (I assumed but didn't check), and then I threw in TLT as well, which is also negative beta. So that's how it evens out to 0 beta.

TLT is maybe a problem since it's so volatile, and people are speculating about a bond bubble.

I thought on a whim that this strategy might be useful to somebody who's really lazy -- you know, just take some Wall Street alpha instead of finding your own. But the expense ratios on these types of ETFs are terrible, especially considering their performance stats. So that eats away at your profit vs capital risked. Puts you at a disadvantage. But I guess you have to look at whether the expense ratios are better or worse than the transaction costs you'd be paying as a retail investor at IB with your own long-short strategy -- and that's even if you have a good long-short strategy that's dependable. I suspect a lot of people struggle finding something that continues to perform reliably out of sample.

Looking at the returns graph you can see that despite the bond hedge and 0 beta it was still hit pretty hard during the Oct 14, 2014. crash, so I'm super skeptical about how resilient these hedge fund-style ETFs are.

Swapped out SMA for TRIMA with a 50 day window.
Returns Increased 1.1
Drawdowns Increased 0.7
Alpha Increase 0.01
Beta Increase 0.01

I dont normally care for these types of algorithms but the low beta and simplicity of it all was interesting.

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: 598a52c9b26f5853cd91b148
There was a runtime error.

Is there any issue with partial fills due to the low volume?

Yeah -- these ETFs are super low volume. Some have huge bid-ask spreads -- so rebalances are going to cost a lot each time.