Rebalancing, Modified Asset Allocation, and Analysis

I have changed the asset allocation schemes by collapsing the US and international equities asset classes into a single class of equities. US and international equities are now equally divided in the equities asset class. For some time I had been thinking about why I allocated 40% of my portfolios to equities. Not only was I concerned with over concentration, I was also worried about correlation between US and international stock markets. When I constructed the asset allocation scheme I realized that the stock markets of 1st world countries tend to move in tandem. Thus I added small cap emerging market exposure to the hedge fund portfolio. However, although individual international stock markets can move independently of others, the indexes reflected in the ETFs all tend to move roughly in tandem. Thus I was not as diversified as I thought and hence the move to collapse two equities asset classes into one.

The other change was to use SHY as the only bond ETF. This was a trading decision based on a review of the charts. The reasoning is the same as that which led to using Eurodollar futures as the bond asset class in the futures portfolio.

In light of these changes, I also rebalanced the small and hedge fund portfolios.

Here is a summary of the performance of the hedge fund portfolio:

Trades 23
# Profitable 9 (39.1%)
# months tracked 9
Profitable months 6 (66.7%)
Avg trade duration 123.7 days
Annual return (compounded) 19.4%
Average win $5,737
Average loss $1,315
Profit factor 3.2:1
Max peak-to-valley drawdown (historical) 5.75%
drawdown period Nov 05, 2010 to Nov 16, 2010
Correlation w/ S&P 0.577
Sharpe ratio 1.867

Here is a summary of the performance of the small portfolio:

Trades 12
# Profitable 6 (50.0%)
# months tracked 9
Profitable months 5 (55.6%)
Avg trade duration 121.1 days
Annual return (compounded) 17.8%
Average win $789
Average loss $281
Profit factor 3.2:1
Max peak-to-valley drawdown (historical) 5.88%
drawdown period Nov 05, 2010 to Nov 26, 2010
Correlation w/ S&P 0.589
Sharpe ratio 1.735

Here is a summary of the performance of the futures portfolio:

Trades 7
# Profitable 6 (85.7%)
Avg trade duration 41.5 days
Annual return (compounded) 116.4%
Average win $2,565
Average loss $3,012
Profit factor 5.1:1
Max peak-to-valley drawdown (historical) 9.8%
drawdown period March 07, 2011 to March 15, 2011
Correlation w/ S&P 0.403
Sharpe ratio 3.67

Clearly these performance numbers are the result of Bernanke’s impersonation of von Havenstein which is driving all asset prices higher as well international turmoil driving oil prices higher. However, this is the nature of trend following systems when strong trends emerge. The flip side is when the party ends and the inevitable drawdowns begin.

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