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AAR Strategy Beat Benchmark By 19.37% In 2013

Jan. 01, 2014 1:21 PM ET
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Seeking Alpha Analyst Since 2012

Brian Johnson is a proprietary trader in options, futures, stocks, and ETFs. He is also the editor and primary author for www.TraderEdge.Net, a blog offering insights and information to help other traders. Previously, he was the vice president and principal responsible for Lincoln Capital Management’s fixed income index business. At Lincoln Capital, he created specialized risk control and valuation algorithms and used those tools to manage over $13 billion in institutional assets. He also served as the President of Carolina Capital Advisors, where he developed neural network forecasting, risk management, and valuation systems for institutional investment advisors. More recently, he designed and taught courses in financial derivatives for both MBA and undergraduate business programs. He has an MBA from the University of Chicago - Booth School of Business, with a specialization in finance. He has written articles for the Financial Analysts Journal, Active Trader Magazine, and a number of other publications. He can be contacted at BJohnson@TraderEdge.Net.

The AAR strategy is a conservative, long-only, asset allocation strategy that rotates monthly among five large asset classes: large-cap U.S. stocks, developed country stocks in Europe and Asia, emerging market stocks, U.S. Treasury Notes, and commodities. It is one of the 20 proprietary strategies that I trade in my account and the only strategy that Trader Edge currently offers on a subscription basis.

The AAR strategy earned a return of 26.11% in 2013, outperforming its equal-weighted index (+6.74%) by a remarkable 19.37% during the year.

Remember that the AAR strategy is not an equity strategy. The AAR strategy is based on the Ivy League portfolio framework and every month it has the option of investing in any one of the five diverse investment candidates described above. If none of the five candidates pass their respective trade filters, the AAR strategy remains in cash for the month. Stop-loss orders are used on every trade to control losses and to facilitate position sizing.

AAR Strategy Returns

Of the five investment candidates, only the e-mini S&P 500 futures contract (ES: +31.50%) and the EAFA index (EFA: +21.44%) earned positive returns in 2013. Commodities (DBC: -7.63%), U.S. Treasury Notes (ZN: -3.83%), and emerging markets (EEM: -3.65%) all earned negative returns for the year.

The returns for the five investment candidates are depicted in green (figure 1 below). The index returns (purple) were calculated using the equal-weighted monthly returns for the five investment candidates, excluding transaction costs. Finally, the AAR strategy return was calculated using the actual strategy signals executed at month-end closing prices, net of estimated transaction costs. AAR subscriptions were first made available to the public in July 2013.

All returns were calculated using prices back-adjusted for dividends and futures roll transactions. All prices and back-adjustments were provided by Commodity Systems, Inc. (CSI), one of the leading providers of market pricing data.

Figure 1: 2013 AAR Strategy Returns

If you are not currently a subscriber and would like to learn more about the AAR strategy, there is a detailed description on the AAR Strategy page.

Disclosure: I am long the current AAR strategy position.

Brian Johnson

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Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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