QAS RISK MANAGEMENT 101
QAS RISK MANAGEMENT IN ACTION BASED ON LIVE INVESTMENT STRATEGY PERFOMANCE ANALYTICS
INVESTMENT STRATEGY “QAS S-130 GLOBAL SMALL-CAP WITH PROTECTION” IS CURRENTLY LICENSED TO A US ASSET MANAGEMENT COMPANY (RIA INVESTMENT PLATFORM).
The QAS S-130 Global Small-Cap with Protection Index reached another new all-time high on November 1st, 2019, returning +22.8% 2019 YTD (compared to +19.1% IWM and 19.7% FTSE Global Small-Cap Index). Currently, the Russell 2000 Index still remains -7% below the previous peak established in August 2018).
We are going to examine this QAS active strategy because the US and overall Global Small-Cap market size segments have been lagging relative to other market segments since 2018, and have undergone significant drawdowns during the 2018-2019 period.
At QAS we believe that risk management is an essential element of the portfolio management process. This part of our research is highly demanded by our clients – portfolio managers, because it has a direct impact on overall alpha generation and portfolio performance results.
The main goal of our quantitative risk management approach is to reduce potential drawdowns as much as possible, which consequently lowers the time of recovery from the troughs to the previous peaks, and allows to achieve new all-time high price points much faster compared to traditional buy-hold investments.
QAS S-130 Global Small-Cap with Protection strategy is one of the most popular thematic investment solutions that we offer to investment advisors in the US. It is based on ETFs that cover US, EU and EM Small-Cap markets, and includes a comprehensive “two-step” risk management technique that gradually reduces overall equity exposure while increasing exposure in a “safety-basket” (treasury and gold).
Despite wide availability and good liquidity of the Global Small-Cap ETFs, these instruments seem to be avoided by investment advisors due to their relatively high risk profiles. By implementing the QAS 5-regime portfolio construction algorithm, we tried to improve the overall risk profile of a Small-Cap investment theme, and make it more attractive for investment advisors.
Let’s review the period from August 1, 2018 to November 1, 2019. This period is helpful in illustrating the most recent drawdowns and overall volatility of the US Small-Cap benchmark.
Source: Bloomberg
The benchmark (Russell 200 IWM) peaked on 08/31/18, then had a drawdown of -27% at a trough point on 12/24/18, and as of 11/01/19 still remained -7% below the peak.
The benchmark (Russell 2000 Index) still hasn’t recovered from the latest drawdown. It has been over 10 months since it reached the lowest price point in December 2018. In addition to an overall negative 2018 performance (-11%), this made the Small-Cap investment universe less attractive relative to other equity market segments.
The QAS S-130 Global Small-Cap with Protection Index had a much lower drawdown for the same period (-17% vs. -27% of the benchmark). This allowed for a full recovery to a peak as soon as 02/25/19, followed by achieving consequential new all-time price high points several times in 2019 (on 05/06/19, and most recently – on 11/01/19).
The price return for this period (08/01/18 – 11/01/19) was the following:
QAS S-130 Global Small-Cap with Protection Index +10.4%
Russell 2000 (IWM) -3.1%
Sharpe Ratio 1.9
Information Ratio 0.9
The index delivered an impressive excess return of +13.5% for the period. Considering there were mostly negative-to-flat market conditions during this period, the biggest part of the alpha was attributable to the functionality of the two protection regimes (Regime 4, 5) embedded in the algorithm behind this strategy. There was also a short period (January-February 2019) when the Russell 2000 index attempted to recover from the lowest point. The strategy switched to a positive regime that was using the 2X leverage US Small-Cap instrument (UWM ETF) to achieve maximum alpha during this period.
As of November 1, 2019 the QAS S-130 Global Small-Cap with Protection Index is in Regime 1 which assumes up to 160% of equity exposure in the Global Small-Cap universe. The current aggressive positive regime allows the investor to receive maximum alpha benefits from strong positive market conditions as defined by QAS methodology.
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