"Hot Potato" anyone??

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adrian2
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Re: "Hot Potato" anyone??

Post by adrian2 » 01 Jun 2017 18:31

AltaRed wrote:
01 Jun 2017 17:30
Dumb question from someone never before in this situation: Is there any conflict having the same asset in an RRSP as a non-reg account (in my case XEF). Seem to recall issues around superficial loss rules?
The RRSP is "an affiliated person", therefore if you intend to realize a loss in non-reg, your RRSP should not have bought the same security in the +/- 30 days window.
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AltaRed
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Re: "Hot Potato" anyone??

Post by AltaRed » 01 Jun 2017 18:38

Thanks. Hopefully never will run that risk if I give this strategy a go. XEF is what I'd want for the Int'l leg.
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oppositeset
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Re: "Hot Potato" anyone??

Post by oppositeset » 03 Jul 2017 18:13

I'm moving it all to XEF tomorrow

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Re: "Hot Potato" anyone??

Post by DenisD » 03 Jul 2017 18:24

Might be wide spreads tomorrow as the US markets are closed.

oppositeset
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Re: "Hot Potato" anyone??

Post by oppositeset » 03 Jul 2017 18:26

Oh thanks for pointing out

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Re: "Hot Potato" anyone??

Post by ockham » 03 Jul 2017 22:28

oppositeset wrote:
03 Jul 2017 18:13
I'm moving it all to XEF tomorrow
Yes, the June month end numbers are available. 12 month returns are:
XEF 20.58
XUS 17.40
XIU 12.16
XBB -0.26

Therefore, I'll close my XUS position tomorrow or Wednesday and buy XEF.

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Re: "Hot Potato" anyone??

Post by ockham » 04 Jul 2017 16:09

Earlier today, sold XUS @ $39.20 and bought XEF @28.871.

jay
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Re: "Hot Potato" anyone??

Post by jay » 05 Jul 2017 09:24

Not sure if this came up before, but http://www.portfoliovisualizer.com allows one to back-test the dual momentum strategy. Here is a =5&timingUnits[0]=2&timingWeights[0]=100&timingUnits[1]=2&timingWeights[1]=0&timingUnits[2]=2&timingWeights[2]=0&timingUnits[3]=2&timingWeights[3]=0&timingUnits[4]=2&timingWeights[4]=0&volatilityPeriodUnit=2&volatilityPeriodWeight=0] backtest using XBB,XIC,XSP and XIN .

I chose those ETFs simply because they have more history.

Here is another =5&timingUnits[0]=2&timingWeights[0]=100&timingUnits[1]=2&timingWeights[1]=0&timingUnits[2]=2&timingWeights[2]=0&timingUnits[3]=2&timingWeights[3]=0&timingUnits[4]=2&timingWeights[4]=0&volatilityPeriodUnit=2&volatilityPeriodWeight=0]backtest that uses 2 momentum assets instead of 1.

Click on the Timing Periods tab to see which asset(s) were being held and for how long.

EDIT: the above links won't format properly for some reason, but they work.

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Re: "Hot Potato" anyone??

Post by ig17 » 05 Jul 2017 10:18

jay wrote:
05 Jul 2017 09:24
I chose those ETFs simply because they have more history.
You picked two ETFs that hedge currency: XSP and XIN. Currency hedging is not part of dual momentum strategy. In fact, it can be seriously counterproductive. See a faq on Gary Antonacci's site:

http://www.optimalmomentum.com/faq.html

There are international stock ETFs that hedge their currency exposure. What do you think about using these with GEM?

There is a tendency for International stocks to outperform U.S. stocks when the U.S. dollar is weak and non-U.S.currencies are strong. This lets us profit from the strength in non-U.S. currencies. When non-U.S. currencies are weak, GEM is often out of international stocks. So there is little reason to use hedged ETFs. GEM automatically deals with exchange rate risk.

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BoomBoom99
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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 05 Jul 2017 10:41

Would not hedged ETFs take the currency risk out of the equation and make the strategy more of a pure play?

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Re: "Hot Potato" anyone??

Post by ig17 » 05 Jul 2017 11:04

BoomBoom99 wrote:
05 Jul 2017 10:41
Would not hedged ETFs take the currency risk out of the equation and make the strategy more of a pure play?
I think it's the opposite. Hedged ETFs are likely to harm the strategy. US equities tend to outperform non-US equities when US dollar index is rising. International equities tend to outperform when US dollar index is falling.

Here's a clearer version of the chart above:

Image

Source:
http://www.sharpereturns.ca/2015/07/mar ... ected.html
4. Direct relationship between US to non-US stocks ratio and USD

This relationship basically says that the relative performance of US stocks to non-US stocks is mainly driven by changes in USD. This makes sense, since when US stocks are doing better than the rest of the world, foreign investors want to invest in the US. This drives up demand for USD.
11. How is any of this relevant to Dual Momentum?

...

GEM uses relative momentum to switch between US and non-US stocks. According to relationship #4, we see that GEM therefore protects against, and profits from, fluctuations in the US Dollar.

jay
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Re: "Hot Potato" anyone??

Post by jay » 05 Jul 2017 13:06

ig17 wrote:
05 Jul 2017 10:18
jay wrote:
05 Jul 2017 09:24
I chose those ETFs simply because they have more history.
You picked two ETFs that hedge currency: XSP and XIN. Currency hedging is not part of dual momentum strategy. In fact, it can be seriously counterproductive. See a faq on Gary Antonacci's site:

http://www.optimalmomentum.com/faq.html
Agreed and I don't use them myself either. I just wanted to point out that portfoliovisualizer.com lets you back-test the strategy with nice elaborate results. I chose the Canadian ETFs with the longest time horizon.

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Re: "Hot Potato" anyone??

Post by ockham » 01 Sep 2017 13:33

ockham wrote:
04 Jul 2017 16:09
Earlier today, sold XUS @ $39.20 and bought XEF @28.871.
The numbers are in for the 12 months ended August 31. XEF continues to lead with a 12 month return of 12.83% (as against XUS at 10.64%, XIU at 7.76% and XBB at -1.67%). Therefore, no changes to the Hot Potato Portfolio required.

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Re: "Hot Potato" anyone??

Post by Rhinox87 » 27 Sep 2017 13:46

Looks like a good strategy for a part of total capital.

I'm curious if anyone has tried including Emerging markets as another asset class in the Canadian backtest of this strategy. I have seen a backtest with Emerging markets included as an asset class in USD and the performance seems to increase with some additional volatility. Risk-adjusted returns remain similar. But, higher performance with additional volatility may be preferred by some with higher risk-tolerance, especially in a registered account where leverage is limited.

ockham
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Re: "Hot Potato" anyone??

Post by ockham » 01 Nov 2017 10:28

XEF continues to have the best 12 month return (for 12 months ended Oct 31) at 19.14%, narrowly leading XUS at 18.35%. Therefore, no changes to the Hot Potato portfolio. I will continue to hold XEF for the month.

oppositeset
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Re: "Hot Potato" anyone??

Post by oppositeset » 01 Nov 2017 21:08

where did you see the return ? it hasn't updated on their website yet

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Re: "Hot Potato" anyone??

Post by ockham » 01 Dec 2017 12:47

I started my experiment a year ago today. No changes required, since XEF's 12 month return remains the highest. But it is now time to evaluate.

My initial stake was $25,000. That's grown to $27,277.11, for a total return of 9.11%. Not bad.

Except that the Couch Potato benchmark* return is 13.05%. Even if I subtract out commission costs ($40.00) and a notional MER (say $60.00), the benchmark return is still 12.65%. Given that the Hot Potato portfolio held no bonds at any time during the year, and that it's bonds that dragged down the benchmark's return, this is truly terrible. I'll have to dig deeper when I have more time to identify the reasons why. (Maybe it's my math that sucks!)

* The benchmark is a Couch Potato portfolio with a 75/25 equity/fixed split, with 25% allocated to each of XIU, XUS, XEF and XBB. The one year return to Nov 30 for each of the components is:
XIU 10.11%
XUS 17.29%
XEF 22.59%
XBB 2.21%

DenisD
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Re: "Hot Potato" anyone??

Post by DenisD » 01 Dec 2017 13:19

One year means nothing.

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Re: "Hot Potato" anyone??

Post by longinvest » 02 Dec 2017 08:26

DenisD wrote:
01 Dec 2017 13:19
One year means nothing.
10 years means nothing.
25 years means nothing.
A lifetime means nothing.
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Re: "Hot Potato" anyone??

Post by ockham » 04 Dec 2017 16:24

DenisD wrote:
01 Dec 2017 13:19
One year means nothing.
Even so, I've dug deeper. What I found was kind of interesting. It turns out, most, perhaps all, of my underperformance is due to performance metrics in April.

From Dec 1 through Mar 31, the HotPot rules dictated that I hold XIU, which in fact I did. As of Mar 31, however, XUS's 12 month return surpassed XIU's. I should therefore have exchanged XIU for XUS on the first trading day in April. However, as I posted above on April 9, due to travel I was unable to do the exchange. By the time of my return home, XIU's 12 month return again exceeded XUS's. I made the decision to continue to hold XIU through April rather than do the exchange a week late.

As it happens, XUS outperformed XIU in April by about 3.5%. That pretty much covers the performance gap between my HotPot portfolio and the Benchmark.

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Re: "Hot Potato" anyone??

Post by ockham » 07 Dec 2017 12:09

longinvest wrote:
02 Dec 2017 08:26
DenisD wrote:
01 Dec 2017 13:19
One year means nothing.
10 years means nothing.
25 years means nothing.
A lifetime means nothing.
I've decided to carry on with my Hot Potato experiment for another year, but with a simplifying modification. I will run it as a three fund portfolio -- XBB, XIU, and XAW -- instead of four ((XBB, XIU, XEF, XUS). I will benchmark it against a standard aggressive CCP portfolio of 50% XAW, 25% XIU, and 25% XBB.

I currently hold XEF. I will swap it for one of the three funds when the 12 month return at month-end of one of the three beats XEF's.

"One swallow does not a summer make" is an ancient Greek maxim. Too bad there's no Greek maxim for how many swallows it does take.

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Re: "Hot Potato" anyone??

Post by ig17 » 07 Dec 2017 20:34

ockham wrote:
07 Dec 2017 12:09
I've decided to carry on with my Hot Potato experiment for another year, but with a simplifying modification. I will run it as a three fund portfolio -- XBB, XIU, and XAW -- instead of four ((XBB, XIU, XEF, XUS).
What evidence do you have to support this new strategy?

FWIW, I think it's a mistake to include Canadian equities in the momentum strategy. As I mentioned before in this thread, Norm's Hot Potato strategy is a derivative of Gary Antonacci's Global Equities Momentum strategy (aka GEM).

GEM uses three asset classes:

US stocks
International stocks
US aggregate bonds

Hot Potato adds a fourth class: Canadian stocks

With all due respect to Norm and his work on Hot Potato, GEM has more evidence behind it. It has a longer history than Hot Potato, has been tested out of sample with real money, and has been independently verified by other researchers. I don't use momentum strategy myself, but gun to my head, I would definitely pick GEM over Hot Potato.

By squishing US and International equities into one asset class, you are moving further away from GEM. So I am going to ask again, what is the evidence behind your new strategy?

===

GEM references:

https://www.amazon.com/Dual-Momentum-In ... 0071849440
http://www.optimalmomentum.com/
http://svrn.co/blog/2015/8/2/is-gary-an ... egy-robust

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Re: "Hot Potato" anyone??

Post by ockham » 08 Dec 2017 09:02

ig17 wrote:
07 Dec 2017 20:34
......... I would definitely pick GEM over Hot Potato.

By squishing US and International equities into one asset class, you are moving further away from GEM. So I am going to ask again, what is the evidence behind your new strategy?

===

GEM references:

https://www.amazon.com/Dual-Momentum-In ... 0071849440
http://www.optimalmomentum.com/
http://svrn.co/blog/2015/8/2/is-gary-an ... egy-robust
Sorry to disappoint, no deep theory or deep evidence to support the new strategy.

For a Canadian couch potato investor, in my view simplest and theoretically cleanest is a three fund strategy: one broad market Canadian bond fund, one broad market Canadian equity fund, one world excluding Canada equity fund. My idea is to try adding the Hot Potato spice to this three-fund model.

p.s. Thank you for the GEM links, including the reference to Isaac Newton. Maybe what couch potato investing and momentum investing have in common is.... inertia.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 08 Dec 2017 12:45

Ockham,

Your modified hot potato strategy looks interesting. Please keep posting your experience with your experiment.

I've pondered modifying the hot potato spice myself. I'd like to make it more TFSA friendly, ie; employ tax efficient ETFs so withholding taxes are eliminated. Horizons has four low cost ETFs suitable for this strategy. None of them pay distributions. They are listed below:
Horizons S&P/TSX 60 Index ETF (HXT)
Horizons S&P 500 Index ETF (HXS)
Horizons Intl Developed Markets Equity Index ETF (HXDM)
Horizons CDN Select Universe Bond ETF (HBB)

I'm interested in your thoughts on using these ETFs in the modified strategy.

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Re: "Hot Potato" anyone??

Post by NormR » 08 Dec 2017 15:42

ig17 wrote:
07 Dec 2017 20:34
FWIW, I think it's a mistake to include Canadian equities in the momentum strategy. As I mentioned before in this thread, Norm's Hot Potato strategy is a derivative of Gary Antonacci's Global Equities Momentum strategy (aka GEM).
Well, to be fair, the idea came from a modification of one from one of James Montier's books. I used a version of it in the G&M a couple of years before the publication of Gary's book.
ig17 wrote:
07 Dec 2017 20:34
With all due respect to Norm and his work on Hot Potato, GEM has more evidence behind it. It has a longer history than Hot Potato,
The limited data set reflects the short life of some of the indexes (IIRC, the bond index in particular) in Canada.

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