1、Sources:DALBAR Inc.,BNP Paribas,Bloomberg;from January 2008 to December 2017 to make the comparison with DALBARs results reasonable.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past performance simulations are the result of
2、estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graph is for illustrative purposes only DALBAR,Inc.operates as a financial service
3、s market research company.It offers evaluation,auditing,rating businesses,customer performance,and product quality services.26/03/2019 1 FOCUS|GLOBAL 26 March 2019 Befriend the trend members momentum strategy KEY MESSAGE The BNP Paribas equity derivatives team has designed anew strategy based on a b
4、readth of momentum indicator:Members Momentum.Backtesting of the strategy suggests it could outperform othermomentum strategies in risk/return terms,while reducing themaximum drawdown.The end of last years market correction and this yearspositive market trend suggest a momentum strategy couldmonetis
5、e the positive market trend,while limiting downsideduring the next correction.Behavioural bias can be one reason investors typically sell out after a large drawdown in equity markets and do not buy back in,missing the potential recovery(for example in March 2009 after the financial crisis).People ma
6、y react far more acutely to a 50%loss than a 50%gain due to loss aversion(Kahneman&Tversky,1979).A simple trend-system to time the entry or exit from equities is a way to avoid this potential bias.This systematic strategy can potentially outperform average biased asset allocation realised returns(Fi
7、gure 1).The Members Momentum(MemMom)strategy can deliver significant risk and return improvement compared to other tested timing systems(Appendix 1).The MemMom strategy allocates between equities and bonds based on a breadth of momentum indicator(Cardenal,2018):the percentage of index members tradin
8、g above their 200-day moving average.If the value of this indicator is above 60,the entire portfolio is allocated to equities;between 50 and 60,50/50 to equities and bonds;and a value below 50 indicates weak momentum,so the allocation is fully to bonds(Appendix 1,flow chart).The strategy rebalances
9、on a monthly basis,as weekly rebalancing does not provide any performance gains and creates a disadvantage in terms of higher rebalancing costs.This system tends to recognise upward and downward market trends(Figures 2,3 and 4).Fig.1:10-year realised returns:average investor vs strategy EQUITY&DERIV
10、ATIVES MODEL SIGNAL Consider a Members Momentum strategy,based on a monthly breadth indicator.In US:invest 50%in equities SPTR or BNPIFMU,and 50%in long-term bonds LT11TRUU index(indicator ref.53.91)In EUR:invest 50%in equities SXXT or BNPIFME,and 50%in long-term bonds LEG2TREU index(indicator ref.5
11、2.79)In US and EUR:no signal to hedge as indicators areabove 50 Fig.2:The percentage of members above 200day MA and strategy signals in EU Sources:BNP Paribas,Bloomberg;from January 2002 to February 2019 Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch MemMom has hist
12、orically shown improvement in three key metrics over a balanced portfolio(60%equities+40%LT bond,Figure 5):1.Absolute return pick-up+3.9%for the US and+3.1%for Europe.2.Maximum draw-down(MaxDD):more than 11%reduction for the US and 18%for Europe.3.Return more than doubled over maximum draw-down(RoMa
13、D=Calmar ratio).In our view,MaxDD is a better measure of risk than volatility,as the former directly relates to loss aversion.Investors react far more acutely to a double-digit loss that to small return variations(Kahneman&Tversky,1979).Squared Members Momentum can enhance absolute performance and o
14、vercome the risk of the momentum factor index.Swap the broad market index to its momentum index(for example using BNP Paribas Equity Momentum indices:for the US;for the EU),all else being equal(the indicator continues to be based on the broad market index).The strategy has historically delivered mor
15、e than an 13.5%average return versus 9-10%in momentum factor indices,while reducing MaxDD by more than 34%compared to the momentum factor benchmark.Moreover,Squared MemMom has historically outperformed the balanced portfolio benchmark on a monthly basis(Figures 11 and 12).26/03/2019 2 EQUITY&DERIVAT
16、IVES Sources for Figures 3-5:BNP Paribas,Bloomberg;assuming investment horizon from 1 January 2002 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past performance simulations are the
17、 result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graphs are for illustrative purposes only.US Europe MemMom(SPTR Index)B
18、P SPTR Index+LT Bond SPTR MemMom(SXXT Index)BP SXXT Index+LT Bond SXXT Return 11.42%7.53%7.41%8.40%5.32%3.38%Volatility 11.11%8.40%14.08%10.91%10.74%17.28%Sharpe Ratio 0.83 0.63 0.37 0.55 0.27 0.05 MaxDD-17.06%-28.72%-50.95%-17.99%-36.29%-56.30%RoMaD 0.67 0.26 0.15 0.47 0.15 0.06 Figure 5:Results of
19、 MemMom,dual momentum and balanced portfolio strategies Fig.3:MemMom can recognise upward and downward market trends but with some lag(EU,rebased to 100)Fig.4:MemMom can recognise upward and downward market trends but with some lag(US,rebased to 100)The momentum investment factor has its own risk pr
20、emium and has historically outperformed the broad market(Jegadeesh and Titman,1993).However,this return pick-up comes with an amplified risk maximum draw-down,the largest single drop from peak to bottom in the value of a portfolio.Therefore,pure momentum is suboptimal for a stand-alone investment.Us
21、ing a momentum factor index can improves strategy performance.We suggest using the BNP Paribas Equity Momentum indices(for the US;for the EU).In this report we call this strategy Squared Members Momentum.The indicator can also work for tactical hedging.When the percentage of members below their 200-
22、day moving average drops below a pre-specified threshold,equity exposure can be hedged tactically,by switching from a pure equity index to its counterpart with a put protective component.Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch 26/03/2019 3 Using the Members M
23、omentum strategy can be more effective than systematic hedging.We also compared MemMom strategy performance with the index plus a put protective component(Figure 13:for the US.Figure 14:for the EU).The strategy provides lower MaxDD than the put protected index(-17.99%versus-34.3%for Europe and-17.06
24、%versus 38.9%for the US).MemMoms absolute return has also previously beaten that of put protected indices:+6.5%pick-up in the US and+4.8%in Europe.MemMoms costless natural hedging could therefore potentially outperform systematic hedging(plus a put protected index).EQUITY&DERIVATIVES Fig 11:Squared
25、MemMom returns distribution in USD Fig 12:Squared MemMom returns distribution in EUR Sources for Figures 8-12:BNP Paribas,Bloomberg;assuming investment horizon from 1 January 2002 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,which may be better or
26、 worse than prior results.These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.
27、The above graphs are for illustrative purposes only.US Europe Sq MemMom(BNPIFMU Index)BP BNPIFMU Index+LT Bond BNPIFMU Index Sq MemMom(BNPIFME Index)BP BNPIFME Index+LT Bond BNPIFME Index Return 13.72%8.62%9.22%13.63%9.49%10.51%Volatility 11.96%8.72%14.53%10.10%9.28%14.52%Sharpe Ratio 0.96 0.74 0.48
28、 1.11 0.76 0.56 MaxDD-17.00%-28.79%-51.21%-12.56%-31.60%-50.05%RoMaD 0.81 0.30 0.18 1.09 0.30 0.21 Fig 9:Squared MemMom performance in USD Fig 10:Squared MemMom performance in EUR Fig.8:Results of Squared MemMom and balance portfolio(BP)based on momentum index strategies Sources for Figures 6-7:BNP
29、Paribas,Bloomberg;assuming investment horizon from 1 January 2002 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past performance simulations are the result of estimates made by BNP
30、Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graphs are for illustrative purposes only.Fig 6:Strategies performance in EUR Fig 7:Strategies performan
31、ce in USD Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch 4 The indicator can also be used for tactical hedging.When the percentage of members below their 200-day moving average drops below 50,one may tactically hedge equity exposure,switching from a pure equity inde
32、x to its counterpart with a put protective component.The indicators value below 50 signals a declining market for the following month,and therefore suggests being fully hedged and only keeping the put protected index in ones portfolio.If the value of the indicator is above 50,the entire portfolio is
33、 allocated to the broad market index.As our backtest suggests,the tactical hedging strategy can add value in terms of reshaping the risk-return profile of the underlying index,and potentially deliver a higher absolute performance over the MaxDD.Of all tested strategies,tactical allocation with the m
34、omentum index for the market portfolio provided the best historical performance.EQUITY&DERIVATIVES Tactical Hedging SPTR SPTR Protective Put 95%Return 9.2%10.1%6.9%Volatility 12.53%14.10%11.47%Sharpe Ratio 0.44 0.46 0.29 MaxDD-38.7%-50.9%-38.9%RoMaD 0.24 0.20 0.18 Fig.15:Tactical hedging performance
35、 in USD Fig.16:Tactical hedging performance in EUR Figure 17:Tactical hedging vs protective put in USD Sources for Figures 15,17:BNP Paribas,Bloomberg;assuming investment horizon from 1 January 1991 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,whi
36、ch may be better or worse than prior results.These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of
37、future performance.The above graph is for illustrative purposes only Potential benefits of the Members Momentum strategy as suggested by our backtesting:1.An easy to implement strategy,using the Breadth of Momentum indicator to allocate tactically between equities and bonds.2.Outperformance over the
38、 majority of momentum strategies in terms of risk-return profile.3.Reduced maximum drawdown and majority of absolute performance versus the broad market captured by hedging timing based on the Breadth of Momentum indicator.Tactical Hedging SX5T SX5T Protective Put 80%Return 1.9%2.0%0.6%Volatility 14
39、.60%17.52%12.29%Sharpe Ratio 0.00 0.01-0.10 MaxDD-34.3%-47.0%-34.3%RoMaD 0.05 0.04 0.02 Figure 18:Tactical hedging vs protective put in EUR Sources for Figures 16,18:BNP Paribas,Bloomberg;assuming investment horizon from 1 February 2008 to 28 February 2019,due to data availability,and monthly rebala
40、ncing.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected b
41、y BNP Paribas,and should not be used as guidance,in any way,of future performance.The above graph is for illustrative purposes only Figure 13:MemMom vs put-protected index performance in USD MemMom(SPTR Index)Protective put 95%Return 11.42%4.92%Volatility 11.11%11.07%Sharpe Ratio 0.83 0.25 MaxDD-17.
42、06%-38.92%RoMaD 0.67 0.13 Sources:BNP Paribas,Bloomberg;assuming investment horizon from 1 January 2002 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past performance simulations ar
43、e the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above table is for illustrative purposes only.MemMom(SXXT Index)Protecti
44、ve put 80%Return 5.40%0.6%Volatility 11.48%12.29%Sharpe Ratio 0.26-0.10 MaxDD-17.99%-34.3%RoMaD 0.30 0.02 Sources:BNP Paribas,Bloomberg;assuming investment horizon from 1 February 2008 to 28 February 2019,due to data availability,and monthly rebalancing.Past results are not indicative of future perf
45、ormance,which may be better or worse than prior results.These hypothetical,past performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in
46、any way,of future performance.The above table is for illustrative purposes only.Figure 14:MemMom vs put-protected index performance in EUR Edmund Shing,Global Head of Equity&Derivative Strategy BNP Paribas London Branch 26/03/2019 Appendix 2:MemMom performance vs corresponding balanced portfolio 5 E
47、QUITY&DERIVATIVES Return Volatility Sharpe Ratio MaxDD RoMaD MemMom(XNDX Index)12.40%12.95%0.79-17.00%0.73 BP XNDX Index+LT Bond 9.32%10.79%0.66-27.02%0.34 MemMom(LCXE Index)5.74%11.23%0.29-23.63%0.24 BP LCXE Index+LT Bond 3.24%10.91%0.07-37.90%0.09 MemMom(SPTRMDCP Index)10.22%12.89%0.60-22.70%0.45
48、BP SPTRMDCP Index+LT Bond 8.72%9.64%0.64-27.38%0.32 Sources:BNP Paribas,Bloomberg;assuming investment horizon from 1 January 2002 to 28 February 2019 and monthly rebalancing.Past results are not indicative of future performance,which may be better or worse than prior results.These hypothetical,past
49、performance simulations are the result of estimates made by BNP Paribas,as of a given moment,on the basis of parameters,market conditions,and historical data selected by BNP Paribas,and should not be used as guidance,in any way,of future performance.The above tables are for illustrative purposes onl
50、y.Appendix 1:Explaining different momentum strategies.Momentum types Description Absolute Investing in rising stocks and shorting falling stocks,based on time-series indicator,eg 12m-1m returns,difference between short-term and long-term moving average Example:Momentum market indices/ETFs Absolute M
