It’s never easy.
Running the Automatic 7 systems this year has been a great success and a great challenge. As 2011 draws to a close, all I can say is, it’s never easy to choose an allocation, and it’s never easy to deliver strong returns. I don’t suppose I should expect it to be.
Gold
Gold is an interesting buggar. I got it into the mix in mid – 2011 and proceeded to do all sorts of batty things that were not indicated by the system. At the end of the year, in my personal account, I lost about 4% of my equity trading in gold despite its theoretically positive contribution to A7′s 2011 returns. For 2012, I resolve to trade gold only within the confines of the system.
MLPs
I suspect that not having Master Limited Partnerships (MLPs) in the rotation is a blind spot and I would like to add AMJ to the rotation, but I have not as of yet. I will probably need to see a longer track record on this ETN (gasp, an Exchange Traded Note) before adding it in, if at all.
Following the plan
Besides gold, I had a couple of notable deviations from the plan in 2011. For one thing, I really levered up on treasury futures in September / October, and I also found myself doing put spreads on IWM in the 4th quarter. Um, yeah, there was no reason for that, and it hurt overall returns. I will track my actual returns in 2012, just as I used to do when I traded forex. This tends to keep me following the system, as I don’t want to have to confess my baseless deviations in public.
Over thinking / tinkering
It is very difficult to avoid the urge to over think and over tinker with these systems…yes indeed, doing nothing is the hardest thing to do! I noticed today that a very simple version of A7 (which will be called A7 Vanilla) returned almost 20% this year. Going forward, I will use this simple version as a benchmark for a couple of fancier optimized versions.
2012 A7 system variations:
For 2012, I will be publishing seven flavors of A7 and stop tracking external TAA systems. External benchmarking is time consuming and it doesn’t add that much value to this site. I will link to other people’s systems as appropriate in the “Influences” section.
So here is the list of systems that I will be maintaining; please note, that as of today, this is not a signal service, and I do not provide investment advice. In the name of having an accurate, replicable track record, I will make every attempt to publish the allocations of all A7 variations in real time; however, if time does not permit me to do so, then I will publish only the A7 Vanilla portfolio in real time with the others being posted shortly thereafter.
A7 Vanilla – benchmark – simple parameters – not optimized
A7 Classic – benchmark – optimized for maximum absolute returns; no leverage
A7 Smooth– optimized for absolute return and smoothness of ride; no leverage; Goal: Beat A7 on a risk adjusted basis; does not attempt to beat A7 Classic on an absolute basis
A7 Plus– optimized for absolute return and smoothness of ride; sometimes uses leverage (primarily levers treasuries via the futures market); Goal: Beat A7 and A7 Vanilla on absolute and risk adjusted basis, and beat A7 Smooth on an absolute basis. A tall order! This is what I have been trading since August 2011, and I do believe if I ever ran a hedge fund or other money management firm, this would be the aggressive version available to the public.
A7 Timid (aka Mom and Pop) – optimized for smoothness of ride; Goal: Beat 50/50 benchmark on absolute and risk adjusted basis…and to use a cliché, “achieve stock-like returns with bond-like volatility”. Again, if I ran a hedge fund, this would be the conservative version available to the public.
A7 Full Tilt – optimized for smoothness of ride; utilizes 2x leverage at all times – Goal: Maximum return in a margin account.
A7 actual – Ed’s actual results in taxable account (attempting to mimic A7 Full Tilt, at least until the drawdowns cause a nervous breakdown!); will show deviation from A7 Full Tilt because of commissions, slippage, use of futures and options instead of margined ETFs, and operator error. Goal: Beat A7 plus on an absolute basis and be volatile enough for my high risk tolerance.
50/50 – benchmark — SPY/IEF – not optimized
Note, I use the term “smoothness of ride” to denote a proprietary optimization function that bears resemblance to a Sortino ratio.
Allocations for January 2012 will be published tomorrow. Happy new year!
), leaving A7 up double digits for calendar 2011.