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The Hedged Aggressive Portfolio

The Hedged Aggressive Portfolio

This is an extension and modification of the basic portfolio described elsewhere ( ).

The basket has been modified to include a leveraged and an inverse ETF, and consists of


Components of the basket are selected and invested in at the beginning of every quarter according to the method described in detail in the earlier post. In this case four ETFs were selected in each of the tranches.

As MVV has been available only since 2007, we have used a synthetic version of the leveraged ETF. During 2007-2013, the back testing with the actual ETF yields a CAGR which is about 1.5% lower than with the synthetic version during the same period, but the other essential details of the results are similar.

Here are the detailed results for 2003:2013

CAGR 17.3%

Sharpe Ratio 1.14

Kelly Fraction .47

Maximum Monthly Drawdown 17.0%

Monthly One Factor Alpha .96%

Monthly One Factor Beta .34

Monthly One Factor R^2 .18 (The low R^2 implies that alpha and beta are not meaningful.)

The equity curve, the Manhattan asset allocation diagram and the basic asset allocation diagram are shown below. In order to display the ability (or lack thereof) of the strategy to respond to the market changes, the second figure also depicts the normalized quarterly price history of SPY in grey. (Note that MVV is labeled as $MVV in the figures to signify its synthetic nature.)

Disclosure: I am long IJS, AGG, LQD.