As we finish up the first quarter of the year, we are also finishing up our seventh full quarter of implementing this strategy in our group paper-trading account. Our results this quarter were negative, making this quarter our worst to date. Starting with January we had our single worst month, but February made up for that month and then some. March, however, was another down month for us. In the end, we were not profitable this quarter (our first down period). Our benchmark closed almost flat for the quarter.
Starting with our absolute returns for the quarter, our losses were driven mostly by the whipsaw action we saw in January on our protective trades. This brought our average monthly return down quite a bit from where it was in December. I think this volatility is going to be here to stay for awhile – at least until the Fed actually does start raising rates. That will probably lead us into a correction of 10% or more, so our protective strategy will still be used as it is.
Our geometric mean shows us a little more of an equal comparison than our absolute returns. Here you can see that we are still outperforming over the past 7 months, but it has fallen to about .about a .7 difference while last quarter it was nearly 2. This is also obvious on the trend comparisons of our average monthly returns.
For those who prefer using the Internal Rate of Return (IRR) for measuring performance, we see that the overall returns remain strong, however not as strong as they were last quarter with our account IRR dropping from ~40 to ~30 while our benchmark dropped only 3 points.
Lastly here is a look at our Sharpe Ratio comparison. Here we can see that the Sharpe Ratio for our benchmark is relatively unchanged however our own ratio dropped by about 2 points. This further illustrates the challenges that this quarter gave us.
So what does that leave for the coming quarter? I suspect that the market will go through a correction later this year – possibly as soon as this summer – but overall I think we will end the year higher than where we started. I looked at the charts for SPY on a quarterly view, and it shows just how strong the returns have been. What I focused on though was the quarters where SPY was down, and not surprisingly our protective strategy would have us positioned bearishly before those down moves completed and moving back to neutral and bullish as the quarter(s) recovered. So considering everything, and looking at the back testing that we did on this strategy, it appears to continue to be taking us down the right track.
