No Change in A Poor Man's Hedge Fund

by Graham Giller July 20, 2009 22:25

With an extra month's data for the Dynamic Trading Risk Factor, we can look to see whether there has been any re-ordering of the members of the XLF that are selected for membership of the Poor Man's Hedge Fund.

Membership of A Poor Man's Hedge Fund

The above data shows no change to our prior computation, and the membership is still:

  1. Invesco plc IVZ
  2. Goldman Sachs Group Inc. GS
  3. Morgan Stanley MS
  4. T Rowe Price Group Inc. TROW
  5. Janus Capital Group Inc. JNS
  6. Ameriprise Financial Services Inc. AMP
  7. Franklin Resources, Inc. BEN
  8. Lincoln National Corp. Inc. LNC

Note that Ameriprise is no longer in the top five, having been replaced by Janus.


A Poor Man's Hedge Fund --- What are the Portfolio Consituents?

by Graham Giller June 03, 2009 12:24

This post describes the first draft of the Poor Man's Hedge Fund portfolio. (This is noted as a first draft because there are several XLF members which exhibited very poor regressions and probably need data cleaning.) As I noted in the prior post, I took all eighty current members for the S&P Select Sector SPDR for the Financials and regressed the adjusted monthly returns of each stock onto the series of monthly returns of the dynamic trading risk factor. Using the for the regressions as a ranking factor, we then picked the top five stocks to build an equal rated portfolio.

Top 5 XLF Member Regressions by R-Squared

These stocks are:

  1. Invesco IVZ
  2. Goldman Sachs GS
  3. T. Rowe Price TROW
  4. Morgan Stanley MS
  5. Ameriprise Financial AMP.

As noted above, we are seeking to choose a portfolio that comprises the five stocks with the highest s for regression of the adjusted monthly returns onto the dynamic trading risk factor. We find a equal weighted portfolio has a regression of 69%; an α of (−1.13 ± 0.48) %/month; and, a β of 3.54 ± 0.24 onto the same risk factor. Therefore, the final portfolio is chosen to weight each stock's dollar value by 5.6% and the residual 72% of the assets are put in treasury bills. In sample, this combination will deliver a portfolio with an effective α of (−11 ± 14) bp/month and a β of 1 ± 0.07. The expected mean return due to the dynamic trading risk factor is 50 bp/month, so we expect this portfolio to deliver an average return of 5% per annum when held entirely passively.


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About the Author

Graham Giller - Headshot GRAHAM GILLER
Dr. Giller holds a doctorate from Oxford University in experimental elementary particle physics. His field of research was statistical astronomy using high energy cosmic rays. After leaving Oxford, he worked in the Process Driven Trading Group at Morgan Stanley, as a strategy researcher and portfolio manager. He then ran a CTA/CPO firm which concentrated on trading eurodollar futures using statistical models. From 2004, he has managed a private family investment office. In 2009, he joined a California based hedge fund startup, concentrating on high frequency alpha and volatility forecasting. My updated resume is on LinkedIn.



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