BlackDog

A Tactical Asset Allocation Strategy

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Intelligent exposure to Large Cap Equity & Fixed Income

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Rebalanced according to Macroeconomic environment

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High Liquidity & Low Volatility

What is BlackDog?

BlackDog is a tactical asset allocation strategy that utilizes highly liquid ETFs of large cap and fixed income instruments. The strategy is designed to outperform traditional 60/40 stock/bond portfolios using dynamic (rather than static) allocations, as well as a strategic selection of ETF holdings. The portfolio is adjusted approximately once per month based on Lucena’s Optimizer in conjunction with Lucena’s macroeconomic ensemble voting model. Due to BlackDog’s low volatility (half the market in backtesting) we leveraged it 2X. By exposing twice its original cash assets, we take full advantage of its potential returns while maintaining market-relative low volatility and risk

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Full Report
The above backtest represents quantitative research and should not be considered as investment advice, or solicitation to buy or sell securities.

Lucena Research is a technology company and everything presented here is derived from quantitative research. The information above is intended for certified investment professionals who understand the inherit risk of investing. It should not be assumed that the above backtest results will be repeatable in the future. Detailed list of securities and the factors used for their selection criteria is available upon request.

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Voting ensemble of Macro-Economic factors to anticipate market risk-on/risk-off trends

BlackDog Goals:

  • Long Only investment in broad, liquid ETFs
  • Low Volatility while delivering comparable returns to the overall market.
  • Dynamically adjusts allocations amongst 9 major assets according to Lucena’s proprietary macroeconomic model

The chart and table below report the performance of BlackDog in simulation from January 1, 2004 to October 6, 2014. The benchmark used is the ETF SPY. Our model portfolio trades at 2x leverage. Accordingly, we backtest at 2x leverage as well.

Our Edge:

  • Utilizes liquid ETFs that represent the largest stocks and fixed income assets in US markets
  • Portfolio is adjusted once per month in accordance with Lucena’s macroeconomic model
  • Monthly Rebalance

How do we pick constituents?

  • Selects ETFs for equities that allocate more weight to lower cap and value stocks than the S&P 500
  • Utilizes anti-correlated securities for fixed income
  • Actively adjusts the ratio of stocks to bonds according to economic indicators

Execution

  • Positions are held for one month (twenty trading days) or until exit conditions are met.
  • Entry and exits are executed through market, Volume-weighted-average-price (VWAP) and Market-on-close (MOC) orders.
  • All open positions are controlled by order-cancels-order (OCO) exit conditions, trailing stop loss and target gains.

Strengths

  • More intelligent than traditional 60/40 allocations
  • Highly liquid constituents
  • Active and agile, with timely responses to changes in macroeconomic regimes

Risks:

  • Exogenous risk or black swan event affecting equity markets or ETFs
  • Protracted unorthodox macroeconomic regime

Risk Mitigation:

  • Enforce maximum position size per equity
  • Trailing stop loss (GTC) placed on every open position
  • Entry via VWAP during active trading hours to provide acceptable depth for trades
  • Exit at close (MOC) reduces slippage and adds liquidity
  • Deep discount brokerage mitigates drag of high-turnover
  • Highly liquid ETFs with low slippage

Disclaimer: This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are based on statistical forecasting which is based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.