Recession Proof your Investment Strategy

This example represents the most basic use of Macrowonk indicators to generate alpha. Basic does not mean ineffective though. Think of this strategy as straddling the divide between passive and active investment doctrines.

Given that hedge fund returns have been falling away over the past 10 years(1), passive funds like ETFs that track stock indices have been gaining in popularity with inflows increasing dramatically.(2) However, one of the disadvantages of going passive is the inevitable drawdown when economic conditions turn ugly. Had you invested in SPY(3)The most popular ETF in the US, tracking the S&P500 stock index in January 2004, your investment would have been doing very well. Until March 2009 that is, when SPY would have seen a 56% drawdown. That situation would be hard to stomach for even the staunchest proponent of passive management.

What if you could add a filter to only invest in index tracking instruments when economic conditions are favourable?

That’s where Macrowonk comes in. In June 2007, our US Employment and Housing Indicators started to show warning signs of economic trouble. Was this warning sign the result of months of analysis into subprime mortgage defaults and bank capitalisation? No, the Macrowonk US Employment and Housing Indicator average momentum moved below 0 (a lot of number crunching occurs behind the scenes, but our goal is to turn noise into signal).

The SPY Index tracker generated a return of just over 100% from the period 2004 – 2016, with a max drawdown of 56%. When using the Macrowonk US Employment & Housing Indicators as a filter for the SPY investment, performance over the same period is 138%, while maximum drawdown was just 14.9%.

That’s outperformance of 37% and a 5x improvement in the Return / Drawdown ratio just by applying a macroeconomic filter.

Importantly, no other conditions were applied during this backtest. These results have not been optimised, the only difference between the two examples is the use of the Macrowonk indicators to time investment in the SPY ETF.

Other Case Studies:

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