CHINA INVESTMENT SOLUTION FROM QAS
RIDING CHINA BUBBLES USING DYNAMIC MOMENTUM REGIMES
This index strategy (QAS S-131) is currently licensed to a U.S. Asset Management Company. For more information, contact www.qas-service.com.
China investing has been full of surprises during the past 10 years. If we have to describe the main challenges of China investing, we see it as periodic sharp “bubbles” with long highly volatile trading ranges in between (+92%, +64%, +78% rallies in 2007, 2015 and 2018).
FXI ETF iShares China Large-Cap
Source: Yahoo.Finance
It is important to mention that the Chinese equity market is increasingly attracting attention of the U.S. financial media. We all witnessed the tremendous growth of the China economy and its stock market, stabilization/liquidity of Chinese currency, and the geo-political influence of China on global processes. One of the most intriguing developments on the news today is surely the “trade war” with China.
Expected Return
Overall, the 10-yr CAGR% for FXI ETF (China Large-Cap) is only +2.4% with average volatility of 30% (!). This return/risk profile does not look very attractive, and this is probably the main reason why investors tend to avoid the China equity market in their portfolios. Based on traditional risk-tolerance methods, this investment instrument would be considered as “high-risk” and most likely not recommended for many groups of investors.
All rallies were followed by significant drawdowns erasing the entire gain, and in many cases falling below theoretical entry points.
No doubt, the China equity market is one of the most challenging stock markets in the world!
QAS Solution
Therefore, on the one hand – we have a major 60-90% rally opportunity, and on the other hand – we have significant historical drawdowns and a high volatility problem. In order to create a reliable strategy, we had to assemble an algorithm that would capture the majority of rallies and concurrently avoid drawdowns and reduce volatility.
We carefully examined all available ETF instruments and selected the following investment universe for the China strategy:
FXI – iShares China Large-Cap ETF (Large-Cap exposure)
XPP – ProShares Ultra FTSE China Large-Cap ETF (2X Large-Cap exposure)
HAO – Invesco China Small Cap ETF (Small-Cap exposure)
GSY – Invesco Ultra Short Duration ETF (Cash)
Considering all information associated with China investing, we created a highly sensitive strategy with three active regimes:
Regime 1 Aggressive with Leverage (150% Equity Exposure)
Regime 2 Positive, Small-Cap Lead (100% Equity Exposure)
Regime 3 Defensive (10% Equity Exposure)
This strategy incorporates three distinct sources of alpha measured against the China Large-Cap Beta benchmark:
- 2X Leverage (Capturing strong positive Large-Cap momentum)
- Small-Cap (Capturing strong positive Small-Cap momentum)
- Defensive (Capturing negative momentum/advoiding drawdowns)
The QAS S-131 China All-Cap w/Protection index shows relatively stable alpha generating results, significantly higher annualized return and reduced volatility.
As of October 30, 2018, the model index remained in the Regime 3 (Defensive) allocation due to a negative momentum signal initiated in June of 2018. The model index is outperforming the benchmark (FXI ETF) by +800 bps YTD 2018.
For more information please visit www.qas-service.com
Intended Application of QAS Data
The QAS Data is hypothetical and therefore does not reflect actual trading. Past performance is not a guarantee of future results. The QAS Data is for informational and educational purposes for investment professionals only, and is not to be used or considered as an offer or invitation to sell or issue or any solicitation of any offer or invitation to buy securities or other financial instruments, or any advice or recommendation with respect to such securities or other financial instruments.
