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CE Quantitative Models – Exploring the Application of Counter-Trend Strategies

CE Quantitative Models – Exploring the Application of Counter-Trend Strategies. For Investment Professional Use Only. Agenda. Defining Counter-Trend models How Counter-Trend works Discover market environment factors that influence performance

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CE Quantitative Models – Exploring the Application of Counter-Trend Strategies

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  1. CE Quantitative Models – Exploring the Application of Counter-Trend Strategies For Investment Professional Use Only

  2. Agenda For Investment Professional Use Only Defining Counter-Trend models How Counter-Trend works Discover market environment factors that influence performance Exploring the environments that are most effective for Counter-Trend (and least) Application to Managed Futures

  3. For Investment Professional Use Only Trend Following

  4. Trend Following For Investment Professional Use Only • Trend Definition – In general, a trend following system aims to invest in the direction of the trend • Most often describe moving average crossover • Short term, medium term, and/or long term

  5. Trend Following For Investment Professional Use Only Characteristics • Reactionary • Hit Ratio – 25% - 40% • Can give back gains at turning points (Whipsaw) • Performs well in long trends

  6. Trend Following For Investment Professional Use Only Crossover Model Example – 30/120 day moving average If 30 day moving average is HIGHER than 120 day moving average, then model would take a long position

  7. Trend Following Short Long Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index. For Investment Professional Use Only

  8. For Investment Professional Use Only Counter-Trend

  9. Counter-Trend (Cont.) For Investment Professional Use Only Definition – Majority of models are looking to sell over bought levels and buy oversold Mean Reversion Shorter Term

  10. Counter-Trend (Cont.) For Investment Professional Use Only Characteristics • Reactionary • Hit Ratio – 55% - 70% • Gains come at inflection points • Performs well in choppy, “noisy” markets

  11. Counter-Trend (Cont.) For Investment Professional Use Only Crossover Model Example – 10/30 day moving average If 10 day moving average is HIGHER than 30 day moving average, then model would take a short position

  12. For Investment Professional Use Only How Counter-Trend Works Case Study

  13. Case Study For Investment Professional Use Only Simple Case Study Rules (Cont.) • Two Models Examined • Simple Trend (Momentum) Model • Buy (Long Exposure) after a ten day high is realized • Sell (Short Exposure) after ten day low is realized • Simple Counter-Trend Model • Buy (Long Exposure) after a ten day low is realized • Sell (Short Exposure) after a ten day high is realized • Holding periods are fixed for both Models

  14. Case Study Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index. For Investment Professional Use Only Simple Case Study Rules • S&P 500 January 1, 1990 to December 31, 2011 • 5547 Trading Days • S&P had a total return of 468.10%

  15. Case Study Table 1: Short Term Momentum Model v. Short Term Counter-Trend Model on the S&P 500 from 1/1/1990 to 12/31/2011 Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index. For Investment Professional Use Only

  16. Case Study Table 2: Annual Performance Summary of 10 Day Counter-Trend Model with 1 Day Holding Period from 1/1/1990 to 12/31/2011 Past performance is not a guarantee of future results. Unlike investments, indices are unmanaged and do not incur management fees or charges; it is not possible to invest in an index. For Investment Professional Use Only

  17. For Investment Professional Use Only Market Environment Factors

  18. Volatility and Noise Series 1 – Volatility 21% Series 2 – Volatility 16% For Investment Professional Use Only

  19. What is Noise? For Investment Professional Use Only

  20. What is Noise? – Numerical Example For Investment Professional Use Only Assumptions – Market is down a total of -2% over a ten day period (sum). Market path is as follows: Total Movement = 10% % Net Directional Movement = ABS (-2%)/10% = 20% Noise = 1 - 20% = 80%

  21. For Investment Professional Use Only Exploring Environments

  22. What Characterizes a “Noisy” Market? For Investment Professional Use Only Noisy Market profile: • Market participants have differing opinions • Market participants must be able to “vote” or express their opinion • Barriers to entry: low • Cost of Trade • Speed of Trades • Free from centralized control • Liquidity

  23. The Data For Investment Professional Use Only • Two sets of data explore the presence of “Noise” • 1926 – 1996 • 1997 – 2013 • Data from 1997 – 2013 used for environment expectations • Structural changes in market beginning in 1997 • All projections are subject to change if adverse structural market changes exist

  24. Why look at data starting in 1997? For Investment Professional Use Only Key structural changes: • September 9, 1997 - The E-mini S&P 500 Futures Contract was introduced by the Chicago Mercantile Exchange, greatly increasing the liquidity and activity of equities futures trading. • Dollar volume increased 8.5x the 5 years proceeding September of 1997 compared to the 5 years preceding the advent of the E-mini contracts • 1997 to 2000 - In concert with the dot-com bubble, online trading and day trading became exponentially more popular. • August 2000 - Regulation Fair Disclosure was put into effect by the U.S. Securities and Exchange Commission, all but eliminating the legal information edge of large institutional investors over others. This regulation increased trading smaller money management firms. • April 9, 2001 - Conversion to decimalization for U.S. equities was completed, which significantly reduced trading costs and increased the liquidity of many stocks because of tighter bid/ask spreads.

  25. Monthly “Noise” For Investment Professional Use Only 1926 – 1996 was 73.63% 1997 – 2013 was 78.62% The majority of the observed months showed “Noise” ranging between 60% - 90% Further – a two sample test of the two time frames’ average noise yielded a t-statistic of 3.54 at the 99.96% confidence level

  26. Volatility and Noise Quadrants For Investment Professional Use Only • Quadrant 1: Low Volatility & Low Noise (Q1: LVLN) • Quadrant 2: High Volatility & Low Noise (Q2: HVLN) • Quadrant 3: Low Volatility & High Noise (Q3: LVHN) • Quadrant 4: High Volatility & High Noise (Q4: HVHN)

  27. Volatility and Noise Quadrants For Investment Professional Use Only

  28. Volatility and Noise Quadrants 1926 -1996 For Investment Professional Use Only

  29. Volatility and Noise Quadrants 1997 - 2013 For Investment Professional Use Only

  30. Volatility and Noise Quadrants 1997 - 2013 For Investment Professional Use Only

  31. S&P Performance by Quadrant 1997 - 2013 For Investment Professional Use Only

  32. Predictability of Noise 1997 - 2013 For Investment Professional Use Only

  33. Simple Counter-Trend Performance Quadrant: 1997 - 2013 For Investment Professional Use Only

  34. For Investment Professional Use Only Application to Managed Futures

  35. Application to Managed Futures For Investment Professional Use Only • These trading models can be implemented through multiple different vehicles including: • Stocks • ETF’s • Mutual Funds • Futures are the vehicle of choice for several reasons: • Liquidity • Cost • Tax treatment • Trend Models have struggled

  36. Summary For Investment Professional Use Only Defining Counter-Trend models How Counter-Trend works Discover market environment factors that influence performance Exploring the environments that are most effective for Counter-Trend (and least) Application to Managed Futures

  37. Risks For Investment Professional Use Only There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate, and you may have a gain or loss when you redeem shares. Exposure to the commodities markets may subject a fund to greater volatility than investing in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as natural disasters and international economic, political and regulatory developments. Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things, increased volatility and transaction costs or a fund to lose more than the amount invested. Investing in Exchange-Traded Funds (ETFs) will subject a fund to substantially the same risks as those associated with the direct ownership of the securities or other property held by the ETFs. Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio. Futures contracts involve additional investment risks and transaction costs, and create leverage, which can increase the risk and volatility of a fund. Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as mutual funds which focus on alternative strategies are not suitable for all investors. Diversification does not assure profit or protect against risk.

  38. Definition of Indexes For Investment Professional Use Only The S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the investable U.S. equity market. The NASDAQ 100 measures the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies. The NIKKEI 225 measures the largest 225 stocks of the Tokyo Stock Exchange. The index is a simple average, unweighted. The Euro Stoxx 50 Index provides a Blue-chip representation of supersector leaders in the Eurozone. Covers Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. One cannot directly invest in an index.

  39. CE Credit For Investment Professional Use Only You will receive an email from 361 Capital following this presentation. If you are a CFP and would like to receive CE credit for your attendance, please respond to that email. If you have other designations with which you would like to receive CE credit, you will be responsible for requesting the credit.

  40. 4600 South Syracuse Street, Suite 500 Denver, CO 80237 www.361Capital.com (303) 224-3900 For Investment Professional Use Only

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