The model gives precedence to risk control over potential rewards. The model is designed to maximize risk adjusted returns over a long period of time. The model is not designed to maximize absolute returns over short periods of time. During Q1 2010, the model stayed true to its design of giving low risk precedence over return.
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Diversification across 10 categories/sub-categories
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Short position in Chinese equities was completely hedged with Taiwanese equities
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Long position in US large cap equities was completely hedged with US small cap equities
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Only net 5% equity exposure
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10% cash held throughout the quarter
GREAT CALLS
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The models stayed short Euro Dollar throughout the quarter. During the quarter Euro fell 5.72%. The model does not use leverage, but in practice, any fund using this strategy would have leveraged the currency position and thus significantly magnified the return.
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The model went long on US senior bank loans. This allocation resulted in 20.85% capital appreciation in the quarter while earning trailing annualized yield of 5.90%.
RETURN
During the quarter the model earned a respectable return though not a spectacular return as in some previous quarters. The reason is that the model gives heavy weight to the first derivative of leading economic indicators. Unfortunately, in the quarter, the markets were mostly liquidity driven. The model gives low weight to liquidity as our research has shown that giving higher weight to liquidity substantially increases the risk. As a comparison, it appears that not many macro funds did spectacularly during the quarter.
The model returned 3.84% for the quarter compared to 2.66% return of MSCI AWI. The model’s out performance is especially noteworthy as the model took only a small fraction of the risk of MSCI AWI.
