Market Regimes
In Part 3 of our Q42009 research update, we’ve uploaded 14 new citations to our reference database that are a little bit outside of our fund’s main focus. The papers pertain to identifying regime shifts – both in the broad sense of dislocations in behavior of the entire market and a narrower focus on changing dynamics in market subsets.
As the academics in us struggle to ignore how close some of this research comes to the kind of technical analysis we are taught to distrust from the first day of Finance 101, we would be remiss to not mention exactly how we use this kind of research. First, a quick review of Andrew Lo‘s “Foundations of Technical Analysis” in the August 2000 issue of The Journal of Finance will go a long way to assuage the reader’s fear of technical analysis. Yes, the subject is given some ‘validation by association’ here by the distinction of the author and publication, but we also agree with the argument that price dynamics encode some of the same sort of human behavioral bias that is central to the mainstream academics who study Behavioral Economics. Regardless, we would stress that Helix does not use this kind of research as prescriptive for our positions, but rather as a way to cluster market environments. We are interested in partitioning the historical record into different regimes so that we may attempt to have our models build themselves against the environments they are most likely to encounter instead of just simply what has been the recent past.
As an example, consider Hynek Mlnarik, Subramanian Ramamoorthy, and Rahul Savani’s February 2009 paper, “Multi-strategy trading utilizing market regimes”. This paper illustrates this idea that different models and parameterizations can be appropriate for different market regimes and the modeller who exploits this information can improve their investment process.
Read past the break for citations for a few of the most interesting papers, or continue to references for the entire set.
- Valeriy V. Gavrishchaka and Valery Bykov, “Market-Neutral Portfolio of Trading Strategies as Universal Indicator of Market Micro-Regimes: From Rare-Event Forecasting to Single-Example Learning of Emerging Patterns,” May 2007.
- Hynek Mlnarik, Subramanian Ramamoorthy, and Rahul Savani, “Multi-strategy trading utilizing market regimes,” February 2009.
- Gary Anderson, “The Janus Factor,” 2003.
- Kevin Lapham, “Using IPOs to Identify Sector Opportunities,” 2009.
- Samuel L. Tibbs, Stanley G. Eakins, and William DeShurko, “Using Style Index Momentum to Generate Alpha,” 2008.
Thumper’s Blog…
Very nice post. I’d like to link back to it from my new blog. Thanks….
Thanks for sharing your thoughts with us.I enjoyed well while reading your article.
Exceptional post you have caused here! The web is stuffed of bad penning and I was grabbed by your clarity. Your decisions are accurate and I will instantly subscribe to your rss feed to remain up to date with your up emerging postings. Yes! I acknowledge it, your authorship style is astounding and i will now work harder on improving mine.
Just wondering if any active traders are starting to trade the ETFs? After reading the book by Larry Connors – High Probability ETF Trading – I switched and I would say overall my results have improved but there are fewer trading opportunities because of the small number of ETFs he writes about. ETFs seem to be a little less erratic in their price movement so that’s good but some of them have poor results using the systems he describes in the book.
I think the answer is highly context sensitive. Our fund, for example, doesn’t run any ETF specific strategies. At the core of our modeling is an attempt to tease out relative mispricings in individual stocks – any aggregate return series like an ETF are mostly helpful for us when we are balancing our risk profile.
That said, I think there are many uses for ETFs in the alternative space. As just one example, I believe if you take a look at the 13-F filings for the Harvard endowment, 9 of their top 10 positions are in ETFs. Though the majority of the endowment’s money is in private vehicles, this still represents hundreds of millions of dollars. Looking at the specific ETFs they invest in, it seems that they use them as an efficient way to gain exposure to emerging markets. I have also seen some discussion around the rise in popularity of leveraged ETFs. The way these get rebalanced implies some interesting effects on their returns that I’m sure are exploited by hedge fund managers. One example strategy would be to simply short both sides of a bull/bear leveraged ETF pair like ERX/ERY. I would also assume that traditional pair traders like using ETFs because of their good liquidity and mean reversion characteristics (they are not likely to go bankrupt the same way that an individual stock is and news is less likely to shock an aggregation than a single stock).
Skillfully well searched post. very this info.
Excellent read, I just passed this onto a colleague who was doing a little research on that. And he actually bought me lunch because I found it for him smile So let me rephrase that: Thanks for lunch!