Effective Volatility Regime

We have developed an investment methodology to identify, on an ex-ante basis, regimes of good and bad volatility for equity markets.  Our approach goes far beyond the concept of low and high volatility regimes.

GoodBadLowHighv2

Volatility Regime shifts present significant challenges for investors because they cause performance to depart significantly from the ranges implied by long-term averages of means and covariance’s. But regime shifts also present opportunities for gain.

Many academic research demonstrates that managed portfolio that take less risk when volatility is high produce large, positive alphas and increase factor Sharpe ratios by substantial amounts. Please refer to the following academic paper for more informations.

We use our volatility regime signals to increase positions in higher-risk assets/strategies during good volatility regime and invest in lower-risk assets/strategies during bad volatility regime.

As illustrated with the graph below (example with the S&P 500 index),  equity markets delivers very good risk-adjusted performance during good volatility regime but failed to do it during bad volatility regime.

SP500GVBVPerf

SP500GRAPHGVBV

As illustrated in the following graph, significant market drawdown occurs during regime of bad volatility (red line). Investing during regime of good volatililty provide a cushion against expsoure to market drawdown.

SP500_Good_Bad_Vol_Index

Our methodology is quite stable in the long term based on different combinations of parameters. As long as we chose parameters that make sense in terms of economics and financials theory, risk of data overfitting is overcome (1). In the following graph, we are showing the result of a strategy (2) based on Volatility Regime with two of our model parameters. The annualized performance range remains quite small for each set of parameters.

StableGraph

DisclaimerOpenMind Capital is registered as a portfolio manager under NI 31-103 in Canada.  We are not registered under the Investment Advisor Act of 1940 in the U.S.A. or in any others legislations.  This presentation outlines the result of a series of back-testing using a financial and mathematical model developed by the firm. Back-tested performance is hypothetical and is provided for information purposes only. The information contained in this presentation is confidential and proprietary to OpenMind Capital. It is provided for informational purposes only. Under no circumstances does the information in this report represent a recommendation to buy or sell investment instruments. Information in this presentation is not complete and does not contain certain material information about making investments including important disclosures and risk factors.

About OpenMind Capital

Newsletter

Contact

Our investment philosophy is based on the concept of Adaptive Investment Approach. This concept is the name given to the investment strategies that under which investors can constantly adjust their investments to reflect market conditions such as the volatility of investments, the return or the current condition of the market (Bull or Bear).

307 – 4060 St-Laurent Blvd.
Montreal, QC, H2W 1Y9

514-667-8782

kgauvin@openmindcapital.com