Summary
This strategy invests in cryptocurrencies and 3x leveraged ETFs and is extremely risky. It is not intended as a standalone investment. Instead, it is meant to boost returns of an otherwise well-rounded portfolio through a small allocation to alternative investments.
- Objective: aggressive growth
- Type: trend-following strategy
- Invests in: ETFs tracking Bitcoin, stocks, T-bills
- Rebalancing schedule: daily
- Taxation: 90% short-term capital gains
- Minimum account size: $3,000
TuringTrader’s Hot Sauce aims to track Bitcoin bull runs, while avoiding much of the asset’s downside. The strategy achieves its objective through a unique trend-following approach, that takes external risk factors into account. Due to the extreme volatility of the traded asset, the strategy requires constant supervision and readiness to trade daily. The strategy appeals to investors seeking additional exposure to alternative investments for their otherwise well-rounded portfolio.
Performance
This table shows the portfolio’s key performance metrics over the course of the simulation:
The following chart shows the portfolio’s historical performance and drawdowns, compared to their benchmark, throughout the simulation:
This chart shows the portfolio’s annual returns:
The following charts show the Monte-Carlo simulation of returns and drawdowns, the portfolios 12-months rolling returns, and how the portfolio is tracking to its benchmark:
![Monte Carlo simulation of returns](https://www.turingtrader.com/wp-content/uploads/2024/01/return-monte-carlo-2-1024x576.jpg?@monte-carlo-chart@)
![Rolling returns and tracking to benchmark](https://www.turingtrader.com/wp-content/uploads/2024/01/rolling-returns-1024x576.jpg?@rolling-chart@)
Asset Allocation
The portfolio last required rebalancing after the exchanges closed on @last-rebal@. Due to fluctuations in asset prices, the exact allocations vary daily, even when no rebalancing occurred. The current asset allocation is as follows:
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Strategy Rules
The operation of Hot Sauce can be summarized as follows:
- Invest in Bitcoin or a triple-leveraged fund tracking the S&P 500 while trending upwards. Invest in treasury bills otherwise.
- Determine asset price trends through a combination of
- A moving average crossover
- A swarm of logarithmic regressions of the price
- An emergency-brake observing recent drawdowns
- Determine asset position sizes through a combination of
- Uncertainty between trend-following methods
- The asset’s short-term Value-at-Risk
- Asset correlation with S&P 500 industry sector dispersion
- Asset correlation with the yield spread between BAA-rated corporate bonds and 10-year Treasuries
- Asset correlation with the yield spread between 10-year and 2-year Treasuries
- Asset correlation with unemployment claims
- Asset correlation with the breakeven inflation rate
The strategy uses a novel trend-following approach, which we like to call Risk-Aware Trend Following. This approach sees price action as the ultimate measure of asset direction. For position-sizing, it considers a number of market-moving risk-factors, and continually evaluates their relevance for the traded asset.
Diversification
Hot Sauce typically invests either in Bitcoin or the S&P 500. As a consequence, there is no direct diversification, and, in the short term, the strategy follows the traded assets. However, the strategy’s tactical aspect accomplishes some limited serial diversification, effectively reducing market correlation.
The Monte-Carlo simulation shows how the strategy significantly decouples portfolio returns from the underlying assets, and achieves an impressive risk reduction.
Returns & Volatility
Like most strategies of this kind, Hot Sauce follows a ‘win more by losing less’ philosophy. While it trails its buy-and-hold benchmark in the short to mid-term, it leads in the long run by losing much less during downturns. Therefore, investors should always contemplate the strategy’s performance over the asset’s full cycle.
The rolling returns chart confirms the statements above. While the buy-and-hold benchmark dips into prolonged periods of negative returns, the strategy fares significantly better. As a result, the tracking chart shows how the strategy expanded its lead over the benchmark with each cycle.
Account & Tax Considerations
When Hot Sauce changes its selection of ETFs, it triggers taxable events. Consequently, the strategy works best in tax-deferred accounts. However, due to its outsized returns, Hot Sauce might nonetheless be useful portfolio component in taxable accounts.
Hot Sauce invests in up to three ETFs simultaneously. Therefore, it works well with account sizes of $3,000 or more.