Sunday, September 2, 2012

Spain portfolio recommendation (from 3, September 2012)

The portfolio recommendation is based on two low-volatility strategies: a long-only minimum-variance portfolio and a “130:30” minimum-variance portfolio, which is long 130% and short 30%.

These strategies use advanced Optimization and Statistics techniques to hedge against the estimation risk of the associated models. As a result, they attain consistently better risk-adjusted returns than market indexes, as these portfolio recommendations show.

For more details about the implementation of these strategies, please read the following post: Some efficient low-volatility portfolios: the minimum-variance policy

The long-only and the 130:30 low-volatility portfolios recommended for this week, with their corresponding weights, can be found in this file: Spain_weights_20120903.csv

Although I recommend a portfolio composition every month, it is desirable to maintain this composition for a quarter year, and then rebalance with the new composition.
The current long-only portfolio composition contains 7 stocks and has changed a bit respect to the previous quarter (one stock has been purchased). The turnover is 22% (due to this change and the portfolio growth). On the other hand, the 130:30 portfolio contains 17 stocks and the corresponding turnover is a bit larger: 51%.
Regarding the performance, over the last year (52 weeks), the long-only strategy attained a volatility of 20% (versus 31% of the IBEX35). The volatility of the 130:30 strategy is even better: 19%.

The weekly 95%-VaR of the long-only portfolio was 4.0% (versus 6.6% of the IBEX35). The corresponding VaR for the 130:30 portfolio was 4.1%.

The last year annualized Sharpe ratio of the long-only strategy was 0.02 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the 130:30 strategy was -0.02. Finally, the SR of the IBEX35 was -0.16 over the same period.

In the next figure, you can see the compounded return over the last 52 weeks of the three considered portfolios.

Both low-volatility portfolios attain better returns than those of the IBEX35.

But let add information about the risk. The next graph shows the risk-return space for the three considered portfolios.

The red point represents the mean return and volatility of the long-only portfolio over the past 52 weeks. On the other hand, the green point represents the 130:30 portfolio, and finally the blue point represents the IBEX35 index over the same 52 past weeks.

We can see the two low-volatility portfolios have better mean returns than that of the IBEX35, and also their volatilities are better. In this case, we say the low-vol portfolios dominate the index.

I have computed the same risk-return space for every week over the last year, using the same 52-weeks historical method to estimate the mean returns and the volatilities. The long-only and 130:30 portfolios attained almost always (100% and 96% of the time, respectively) a higher return than that of the IBEX35. Moreover, the volatility of both low-vol portfolios was always less than that of the IBEX35.  

As a summary, the low-volatility strategies dominate the market index most of the time, showing they attain consistently better risk-adjusted returns.

1 comment:

  1. Great article, the 130/30 has became the darling of the hedgefunds, however it is used with some adjustment in the weight of the long short positions, further analysis would indicate the optimal weight. How did you solve the issue of the short sale ban on financials which later was extended to all IBEX35 compenents?