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Risk Management and Dynamic Beta Podast

August 4, 2017

I had the honor of speaking with Mebane Faber of Cambria Investment Management recently where I discussed the topic of risk management and also applying a dynamic beta approach on his widely popular podcast “The Mebane Faber Show”. The interview is almost an hour and covers a wide range of topics whether you are a quant geek like myself or an investor.

Here is the link to the podcast.

Episode #64: David Varadi, “Managing Risk Is Absolutely Critical”


Welcome QuantX!

January 27, 2017


I am very proud to announce that readers can finally have access to products based on many of the quantitative ideas used in the blogosphere and published in academic research. Yesterday we launched five new ETFs through the QuantX Brand (linked to Blue Sky Asset Management).  They provide the building blocks to design customized portfolios with downside protection as well as  ETFs focused on enhanced stock selection. The funds follow quantitative strategies that are familiar in a tax efficient and transparent ETF wrapper. You can check out our new QuantX website:   and our recent press release:

Now that we have gone through the long and arduous launch process, I will have more time to write about quantitative ideas and also some of the cool new concepts behind the funds!

Tracking the Performance of Tactical Strategies

September 8, 2016


There is a cool new website that tracks the performance of well-known tactical strategies. AllocateSmartly  has collected an extensive list of strategies from well-known hedge fund managers like Ray Dalio along with several other portfolio managers and financial bloggers. The backtests for these strategies use a very detailed and comprehensive method that is both conservative and realistic. Where possible, the author uses tradeable assets rather than indices and factors in transaction costs along with careful treatment of dividends. The current allocations and performance are tracked in real-time which allows investors to be able to realistically trade these portfolios. Curiously the best performing model tracked on the website this year is the Minimum Correlation Algorithm from CSSA which says a lot about the importance of diversification in 2016 versus momentum and managing risk via trend-following/time-series momentum. In fact, if you dig deeper you will notice that most of the best performers have a structural or dynamic diversification element. The worst performers have been the most concentrated and oriented toward identifying the best performers. As the website correctly points out- the diversification oriented strategies tend to do well during normal market conditions but ultimately the dynamic and more tactical strategies outperform during bear markets. Over longer backtest periods, the more truly tactical performers had better long-term performance. Different market regimes will reward different approaches depending on how predictable and interrelated the markets happen to be that year. An umbrella is great for a rain storm but less than ideal for a sunny day. That is why it is important to understand the strategies you are following and why you are investing in them rather than blindly chase performance. While many quant developers and investors chase the best looking equity curves it is important to consider two primary factors: 1) the utility curve that works best for any one individual is a very personal choice (ie risk/reward and tracking error) 2) you need to choose a set of assumptions for capital markets either going forward or over the long-term: will returns, correlations or volatility be predictable and if so which will be the most predictable and why.

On a side note, I was informed that the very popular “A Simple Tactical Asset Allocation Strategy with Percentile Channels” by CSSA is also being added to the AllocateSmartly website very soon. This is a tactical and structural diversification hybrid that provides balanced factor risk with the ability to de-risk during market downturns. While it lacks the higher returns of more momentum-oriented or equity-centric strategies it provides a steady and low-risk profile across market conditions.



Disclosure: The author(s) principally responsible for the preparation of this material are expressing their own opinions and viewpoints, which are subject to change without notice and may differ from the view or opinions of others at BSAM or its affiliates. Any conclusions presented are speculative and are not intended to predict the future of any specific investment strategy. This material is based on publicly available data as of the publication date and largely dependent on third party research and information which we do not independently verify. We make no representation or warranty with respect to the accuracy or completeness of this material. One cannot use any graphs or charts, by themselves, to make an informed investment decision. Estimates of future performance are based on assumptions that may not be realized and actual events may differ from events assumed. BSAM is not acting as a fiduciary in presenting this material. Benchmark indices are presented or discussed for illustrative purposes only and do not account for deduction of fees and expenses incurred by investors.

The strategies discussed in this material may not be suitable for all investors. We urge you to talk with your investment adviser prior to making any investment decisions. Information taken from Minimum Correlation Algorithm strategy article is publicly available and used by a third party to generate the strategies and signals provided on We have not reviewed and do not represent this information as accurately interpreted or utilized.

Book Review: Adaptive Asset Allocation

February 29, 2016

aaa pic
















I recently read “Adaptive Asset Allocation” ( link to the book) by Butler, Philbrick and Gordillo of ReSolve Asset Management.  The book is the culmination of research  developed over the years by the ReSolve team towards the next generation approach of dynamic asset allocation. The core principles of this approach are the ability  to “go anywhere” and adapt to changes in the economic environment in the quest for greater risk-adjusted returns. (CSSA readers may recall a post we did a while back on adaptive asset allocation, if not it is worth a refresher along with one of the original whitepapers on AAA)    The book is extremely well-written, and the chapters are easy to read- developing the story persuasively from cover to cover.

This book is not a dense quantitative tome , but rather a summary of a coherent and rigorously developed investment philosophy that is carefully built around academic research and concepts. To that extent, Adaptive Asset Allocation is a true “tour de force” and a key contribution to the field of asset allocation theory.  Without this background, it is impossible to frame ideas properly within any trading system or tactical asset allocation model. It is far too easy to get confused over the wide range of possible approaches to portfolio management: should you use momentum? should you seek to minimize risk?  should you use long-term or short-term estimates? should you include or exclude certain asset classes? what time frame should you trade on? Ultimately the answers to these questions are driven by having a framework that neatly incorporates what input assumptions that you are confident in making versus those that you don’t know anything about. The book really helps to address these key issues in the development of trading models/systems.  Adaptive Asset Allocation also neatly ties in the natural link between an active asset allocation approach and financial planning. Much of this is both theoretical and also based on their experience working as financial advisors with wealthy clients.  The authors show that managing “volatility gremlins” with a portfolio management approach that is specifically designed to manage volatility itself is critical for investors in retirement.  Adaptive Asset Allocation is not just an investment philosophy or a quantitative approach, but rather the book proves that it is a coherent and comprehensive solution for wealth management.

Who should read the book?:  If you are a short-term trader that is looking for trading system ideas this probably isn’t for you. But if you are an investor, a portfolio manager, or a trader interested in longer frequency models, this is an essential book that will help to develop and crystallize your thinking towards asset allocation.


Volatility Futures and S&P500 Performance

February 23, 2016


We wrote a more quant-friendly  article on volatility futures and their impact on S&P500 performance recently on our blog for Blue Sky Asset Management. We will be dedicating a section of the blog specifically for more technical articles. This is the first of many that we have planned in the coming months so stay tuned for more  geeky quant goodness!

Investors Should Tread Lightly

September 4, 2015

tread lightly







A tactical approach based on momentum would require that investors reduce their risk recently as volatility rose and trends deteriorated. Obviously no one knows what will happen going forward (ie is this a bull market or a correction) but from a purely qualitative perspective, the economic environment warrants more caution than usual. In general it is my belief that the global quantitative reflation is nearing the end of its course and overall efficacy. Like the last five episodes of “Breaking Bad”, investors can expect a wild ride with many different twists and turns.   Read our recent post here.

The Observation Model is the Best Defense

July 16, 2015










This post is a follow up to part one: Defense is the Best Offense

Sometimes the decisions we make in everyday life are good case studies for making effective investing decisions. My wife and I recently traveled to Santorini Island in Greece where we stayed in the village of Imerovigli. During our trip we planned to hike to Oia – which has the nicest views on the island. The hike would take roughly two hours through a couple small towns and some isolated mountainous terrain beside the Aegean Sea.  click here to read the full story