Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

StockMarketStudent Challenge: 100 Stock Hedge Fund

I'm starting to design a fully hedged 100 stock high liquidity portfolio based on the S&P 500 sector weight tracking technique that I described in S&P 500 Sector Tracking. I will be reporting my progress over the next several posts.

I haven't issued a challenge to the Portfolio123 community for a long time so I thought it would be fun to do so. The portfolio will consist of S&P 500 stocks only, and meet the conditions listed below. First prize is a pat on the back and boasting rights.

Stock market analysis fueled by Portfolio123.

If anyone (other than myself) is up for this challenge then it will be split into two phases. The first phase is to come up with a simulation that meets the criteria outlined below. The second phase is to create a port that rebalances automatically and let it run for one year out-of-sample. The winner is the out-of-sample winner, not the best looking simulation.

Simulation Performance:

As a minimum, the backtest must produce an average annualized return greater than 5% to be considered for phase 2. In addition, the average profit per closed trade must be greater than 3%. These statistics must be generated over the last ten years only. I don't care pre-2007 as just about any ranking system factor will outperform quite nicely.

The hedge must be 100% short S&P 500 ETF (Symbol: SPY) and fully engaged all the time. i.e. there will be no market timing.

The holdings must generally maintain the sector weights of the S&P 500 Index using the Buy rules identified below. The portfolio weights must be sync'd to the S&P 500 by selling all stocks and re-buying according to the sector weight requirements at least once per year, preferably quarterly.

General Setup, Position Sizing, and Stock Universe

Slippage must be set to variable. Margin must be enabled as the hedge will be a short position. The margin carry cost should be set to 2%. Price for transactions should be set to Next Average of Hi and Low. The average number of positions must be 100.0 with a maximum position deviation of 10%. The stock universe must be the S&P 500 Index.

Note: the rules will be provided by way of a link to a public simulation at the end of this post.

Hedge Fund Challenge: General setup and position sizing

Buy/Sell Rules, Hedge, Period and Restrictions

The Buy/Sell rules, hedge, Start Date (ten years back), and restrictions settings are shown below. Items highlighted with a red box are mandatory. There should also be no buy or sell restrictions.

Note: the rules will be provided by way of a link to a public simulation at the end of this post.

Hedge Fund Challenge: Buy/Sell Rules, Hedge, and Time Period

Sector Allocation

In order to make sure the design meets the intent of sector weight tracking, one should be able to run the backtest and stop on any date, then compare the sector allocation to a third party listing for the S&P 500 Index.  The sector allocation should be reasonably close, within a couple of percent for any sector.

Hedge Fund Challenge: Simulation sector allocation should match the S&P 500 Index sector weights

% Cash Invested

With the hedge disabled, the backtest should show the % cash invested being close to 100% for the entire duration of the simulation.

Hedge Fund Challenge: Cash invested should be close to 100% all the time

Example Simulation

Below is an example public simulation to get you started.  The annualized return is below requirement so you have some work to do.  (What, you thought I was going to do it all for you?)

Simulation:  StockMarketStudent Challenge - Hedge Fund

Custom Series:  wDiscrwEnerwFinwHealwIndwMatwRealwStapwTechwTelwUtil

Custom Formulas:  $Discr, $Ener, $Finan, $Health, $Indust, $Mater, $Real, $Stap, $Tech, $Tel, $Util, $wDiscr, $wEner, $wFin, $wHeal, $wInd, $wMat, $wReal, $wStap, $wTech, $wTel, $wUtil


Hedge Fund Challenge: Example simulation backtest results

I hope there are a couple of trading system junkies out there willing to take up this challenge. In any case, I will be working on this little hedge fund project and reporting on my progress.