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Value Investing Strategy (Strategy Overview)

Allocations for September 2021 (Final)
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Momentum Investing Strategy (Strategy Overview)

Allocations for September 2021 (Final)
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Currency Trading

Currency trading (forex or FX) offers investors a way to trade on country or regional fiscal/monetary situations and tendencies. Are there reliable ways to exploit this market? Does it represent a distinct asset class?

Predictable Bitcoin Momentum or Reversion?

Does bitcoin (BTC) price predictably exhibit momentum or reversion? To investigate, we try three tests:

  1. Calculate autocorrelations (serial correlations) between daily, weekly and monthly (4-week) BTC returns and BTC returns for the next five respective intervals (for example, correlation of daily return with returns the next five days). Positive and negative correlations suggest momentum and reversion, respectively.
  2. Calculate correlations between next-week BTC return and current BTC price relative to its high or low over the last 13 weeks. A positive correlation for closeness to the recent high (low) suggests momentum (reversion).
  3. Calculate average next-week BTC returns by ranked fifth (quintile) of BTC price relative to its high or low over the last 13 weeks.

Using daily, weekly and monthly (4-week) BTC closing prices during September 14, 2014 (the earliest available from the source) through August 31, 2021, we find that:

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Bitcoin Displacing Gold?

Is Bitcoin beginning to displace gold as a U.S. dollar hedge? To investigate, we look at rolling correlations of returns for the following pairs of exchange-traded funds (ETF):

  1. Grayscale Bitcoin Trust (GBTC) and SPDR Gold Shares (GLD). This relationship should perhaps trend negative if investors are shifting from gold to Bitcoin.
  2. GBTC and Invesco DB US Dollar Index Bullish Fund (UUP). This relationship should perhaps trend negative if investors are hedging currency weakness with Bitcoin.
  3. GLD and UUP. This relationship should perhaps trend less negative if investors are shifting away from gold as a currency hedge.

Using daily and monthly adjusted prices for these three ETFs during May 2015 (limited by GBTC) through mid-August 2021, we find that: Keep Reading

Are Managed Futures ETFs Working?

Are managed futures, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider three managed futures ETFs, all currently available:

  1. WisdomTree Managed Futures Strategy (WTMF) – seeks positive total returns in rising or falling markets that are uncorrelated with broad market equity and fixed income returns via diversified combination of commodities, currencies and interest rates futures.
  2. First Trust Morningstar Managed Futures Strategy (FMF) – seeks positive returns that are uncorrelated to broad market equity and fixed income returns via a portfolio of exchange-listed futures.
  3. ProShares Managed Futures Strategy (FUT) – seeks to profit in rising and falling markets by long and short positions in futures across asset classes such as commodities, currencies and fixed income such that each contributes equally to portfolio risk.
  4. iM DBi Managed Futures Strategy (DBMF) – seeks long-term capital appreciation via long and short positions in futures across the asset classes such as equities, fixed income, currencies and commodities. Fund positions approximate the current asset allocation of a pool of the largest commodity trading advisor hedge funds.

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR), maximum drawdown (MaxDD) and correlations of returns with those of SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT), all based on monthly data, as key performance statistics. We use Eurekahedge CTA/Managed Futures Hedge Fund Index (Eurekahedge) as a benchmark. Using monthly returns for the four managed futures funds as available through July 2021, and contemporaneous monthly returns for the benchmark index, SPY and TLT, we find that:

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Future of Stablecoins?

The National Bank Act of 1863 created a national currency backed by U.S. Treasury bonds and curtailed the era of Free Banking (wildcat private currencies), which resembles the current environment of stablecoins (such as Tether and Diem). Subsequent legislation taxed private currencies out of existence. Does this history offer lessons for the future of stablecoins? In their July 2021 paper entitled “Taming Wildcat Stablecoins”, Gary Gorton and Jeffery Zhang explore the feasibility of stablecoins as a medium of exchange, with focus on acceptance at par and susceptibility to runs. They also present proposals to address  systemic stablecoin risks. Based on lessons from history, they conclude that: Keep Reading

Defi Risks and Crypto-asset Growth

What Decentralized Finance (DeFi) issues may dampen associated interest in crypto-assets by undermining its promises of lower costs and risks compared to traditional, centralized financial intermediaries? In their June 2021 book chapter entitled “DeFi Protocol Risks: the Paradox of DeFi”, Nic Carter and Linda Jeng discuss five sources of DeFi risk:

  1. Interconnections with the traditional financial system.
  2. Blockchain-related operational issues.
  3. Smart contract vulnerabilities.
  4. Other governance and regulatory concerns.
  5. Scalability challenges.

A general objective of DeFi is automating rules for behavior in a publicly available financial system, eliminating human discretion from financial transactions/contracts. In practice, however, core DeFi protocols retain some human oversight to address unpredictable problems as they emerge, but such retention allows incompetent or malicious governance, administration and validation (see the figure below). Based on review of the body of research and opinion, they conclude that:

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Best Safe Haven ETF?

A subscriber asked which exchange-traded fund (ETF) asset class proxies make the best safe havens for the U.S. stock market as proxied by the S&P 500 Index. To investigate, we test 14 ETFs as potential safe havens:

Utilities Select Sector SPDR (XLU)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
Vanguard REIT ETF (VNQ)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest (DBV)
SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)

We consider three ways of testing these ETFs as safe havens for the U.S. stock market based on daily or monthly returns:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions at daily and monthly frequencies.
  2. Performance during S&P 500 Index bear markets as defined by the index being below its 10-month simple moving average (SMA10) at the end of the prior month.
  3. Performance during S&P 500 Index bear markets as defined by the index being -20%, -15% or -10% below its most recent peak at the end of the prior month.

Using daily and monthly dividend-adjusted closing prices for the 14 ETFs since respective inceptions, and contemporaneous daily and monthly levels of the S&P 500 Index since 10 months before the earliest ETF inception, all through late April 2021, we find that: Keep Reading

Measuring Crypto-asset Price and Policy Uncertainty

How uncertain are investors about cryptocurrencies, and what drives their collective uncertainty? In their March 2021 paper entitled “The Cryptocurrency Uncertainty Index”, Brian Lucey, Samuel Vigne, Larisa Yarovaya and Yizhi Wang present a Cryptocurrency Uncertainty Index (UCRY) based on news coverage, with two components defined as follows:

  1. UCRY Policy -weekly rate of cryptocurrency policy uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.
  2. UCRY Price – weekly rate of cryptocurrency price uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.

They distinguish between these two types of cryptocurrency uncertainty to understand differences in behaviors between informed (policy-sensitive) and amateur (price-sensitive) investors. Using 726.9 million relevant date/time-stamped news stories during December 2013 through February 2021, they find that: Keep Reading

Comparing and Contrasting Gold and Bitcoin

Are gold and bitcoin similar assets? In his December 2020 paper entitled “Bitcoin is Exactly Like Gold Except When it Isn’t”, Claude Erb compares and contrasts the following aspects of gold and bitcoin:

  • Inflation hedge – how well an asset tracks some measure of inflation/purchasing power.
  • Store of value – the ability of an asset to hold its value over long periods.
  • Safe haven – how well an asset holds its value during equity market crashes.
  • Valuation – intrinsic value of an asset.

Based on a survey of related research and arguments, he concludes that: Keep Reading

SACEVS and SACEMS from a European Perspective

A European subscriber asked about the effect of the dollar-euro exchange rate on the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we each month adjust the gross returns for these strategies for the change in the dollar-euro exchange rate that month. We consider all strategy variations: Best Value and Weighted for SACEVS; and, Top 1, equally weighted (EW) Top 2 and EW Top 3 for SACEVS. We focus on SACEVS Best Value and SACEMS EW Top 3. We consider effects on four gross performance metrics: average monthly return; standard deviation of monthly returns; compound annual growth rate (CAGR); and, maximum drawdown (MaxDD). Using monthly returns for the strategies and monthly changes in the dollar-euro exchange rate since August 2002 for SACEVS and since July 2006 for SACEMS, both through December 2020, we find that: Keep Reading

Crypto-assets as Currencies

Can Bitcoin, or any other crypto-asset, become a durable currency, or is its value a pure bubble? In his October 2020 paper entitled “Fiat Money, Cryptocurrencies, and the Pure Theory of Money Edward Elgar Handbook on Blockchain and Cryptocurrencies”, David Glasner applies basic concepts and doctrines of the economic theory of money to address the value of bitcoins and other crypto-assets. He focuses on rationalizations for a positive equilibrium value for bitcoin and other crypto-assets. Based on his interpretation of theory, he concludes that:

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