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40% YTD Outperformance – How to Profit From Short-Term Equity Momentum

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April 6th, 2020




Andreas Bezner

We at Stableton focus on providing our investors access to an alternative investment strategy with the potential to perform well in all market regimes, but particularly during challenging market conditions. One of which we have jointly launched with a top-tier partner, the short-term equity momentum and income strategy, has a particular risk-averse trading approach. With this approach, we are well prepared and positioned to deal with the current fear-driven, wild price swings in this exceptional market environment, as outlined by the massive outperformance of more than 40% YTD. Fears over the impact of the spreading coronavirus again dictated market performance in March. In the U.S., the economy is now entering into a recession. In essence, the massive number of initial jobless claims (over 3 million) demonstrates how many and how quickly U.S. businesses have had to let staff go in the face of the sudden coronavirus shutdown. Policymakers are trying to limit the impact of this recession with the Fed cutting the key interest rate to zero and restarting Q.E. while Congress agreed on a USD 2.2 trillion bill to support the economy. The global economy has grown for 43 quarters in a row, according to data compiled by Bloomberg, but the coronavirus will most probably break that streak. These worries seem reasonable as China’s measures will depress activity and take time to reverse, which will create issues for economies across Asia and far beyond. All of the above warrants going to a risk-neutral allocation or, at the very least having tail risk protection for most portfolio managers. The volatility index (VIX) has become the main gauge for investors to assess the overall health and state of the financial markets. The VIX index has continued to soar and has reached new record high levels not seen in decades, 85.47% on March 18th. Any excessive volatility environment means three things: ultra-fast price movement, widening bid-ask spreads, and reduced liquidity. In other words, one not only needs a very responsive trading system – as signals do change quickly – but also smart execution to get orders filled in fast markets where emotions tend to overtake rational decision-making. Fortunately, this is precisely the mission of a systematic trading approach, like our short-term momentum and income strategy. The strategy aims to detect every statistically significant price move and quickly pick up any critical change in sentiment, momentum, or trend. This does not imply that we will not have to face challenging trading experiences in the weeks ahead, as we may see frequent switches in our net trading position. In these uncertain and challenging times, we are proud to report very positive results for our trading strategy for March. Not only were we able to avoid the horrendous -12.51% drop of the S&P, but we also managed to generate net profits after all fees of +13.4% for March, bringing the YTD profits to +20% while our benchmark, the S&P stands at -19% YTD. Noteworthy is that this +20% YTD net gain was achieved without taking much risk. Such results are not atypical for a swift, risk-averse trading approach such as our short-term equity momentum strategy: Higher volatility regimes tend to bring about more frequent and more extreme price moves. However, while volatility is over the longer-term inherently mean-reverting, it also tends to ‘cluster’. In other words, the high vol levels of the last 6 weeks could be with us for several more weeks, if not months. But, more importantly, with our model’s predominant focus on strict risk management, all of our option positions have a ‘limited risk / unlimited return’ profile at all times. Limited risk because we are net buyers of options and never have open-ended risk on any trade. As we do not hold futures positions overnight (unless fully hedged by options), this also eliminates all potential gap risks. All of our trades are short- term in nature and strictly model-driven, meaning that these positions can and will change on a dime to reflect any adverse price movement. In a nutshell, with our risk-averse trading approach, we are well prepared and positioned to deal with the current fear-driven, wild price swings in this exceptional market environment. Stableton’s alternative investment Fintech platform is striving to become the globally leading market network for qualified and institutional investors seeking exposure to liquid alternatives, private equity, including venture capital, private debt, and real assets. Our platform investors are benefiting from easy access, unique opportunities, performance, and measurable impact across absolute return strategies and alternative investment content from world-class investment providers.

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