Observations on Signal Sigma Strategies quarterly performance

Achieving positive returns by being long-only in an otherwise negative market environment is a daunting challenge, but 2 of our 3 automated strategies managed to do it in Q3 of 2022. Enterprise (our core model) performed the best, even though its main “ingredients” provided terrible returns. The US Dollar ravaged everything in its path, and to put our strategy results into perspective, we need to understand how other asset classes performed during the quarter:

• SPY -6.49%

• TLT -11.54%

• DBC -10.68%%

• GLD -8.11%

Investors had nowhere to run or hide during Q3 except cash (the US Dollar) or short positions. Our strategies do not employ net short allocations, so they only had cash as an alternative to preserve capital. And capital preservation is where our models shine.

Strategy Returns

Our models aim to blend asset classes that “work” into a portfolio that returns a smooth, upward sloping equity curve. The strategies differ in allocation method and aggressiveness, with good risk-reward characteristics for each. Drawdowns are limited by using a volatility parity system and eliminating asset classes that violate stop losses. Right now, 3 out of 5 asset classes are deemed un-investible (Equities, Treasuries, Gold). Let’s review our models performance during the quarter, in one of the worst environments to be long-only in:

• Enterprise (least risky strategy): 0.34%

• Nostromo (moderate risk): 0.01%

• Horizon (high risk): -2.22%

• Sigma Portfolio (discretionary blend): -1.99%

As you can see, all of our strategies managed to outperform a benchmark 50% equities - 50% treasuries portfolio.

Sharpe Ratio

From a 6-month rolling sharpe perspective, we are noticing all algorithms are coming off relative lows. Horizon is still struggling with the recovery, but in due time, relative outperformance should move this measure towards neutral, and then positive again. Historically, abnormally low 6-month rolling sharpe periods have proven good entry points into following the automated models.

Max Drawdown (Underwater Plot)

The Max Drawdown characteristics for all models are also testing the lower bounds. Horizon is again the exception, since it has not been backtested during the Great Financial Crisis. For this model, a bear market is a novelty, but so far it is performing within the bounds of a high-risk, high-reward strategy. Enterprise is the model that is looking best from this perspective, and is clearly showing why it is the centerpiece of Signal Sigma strategies.

One thing is clear: the current drawdown is one of the most significant on record for all strategies, as well as for a 60-40 Stocks-Bonds portfolio (-19% YTD).

Conclusion

Q3 performance has been relatively good, when compared to the returns of all other alternatives. Our strategies are turning a corner and starting to show why systemic capital management works.

The preservation of your capital during down markets is one of the most important aspect of long-term success in the financial markets. As the bear market becomes “official” (different metrics start to confirm this thesis), our models are shutting out loss-making asset classes.

On the discretionary side of the management business (the Sigma Portfolio), we are looking to be net beneficiaries of a market downturn by actively getting net-short at opportune moments.

Detailed performance tear sheets are available via our Reports Page.

Andrei Sota