Long/Short Trading Strategy. Cam’s Crazies Global Asset Allocation February 2005. Agenda. Methodology Factors UniVariate Models Book to Price Dividend Yield FY2 Earnings Yield to Growth BiVariate Model Scoring Model Why Results Might Be Wrong Follow-up Research Conclusion.
Global Asset Allocation
Go long stocks with high B2P ratios (low Price to Book) and short stocks with low B2P ratios.
Average annual return of 9% and .53 Sharpe ratio.
High volatility of returns (+48% and -23%). The screen did not perform well during the
1998-1999 valuation bubble, producing -21% and -11% returns, respectively.
Go long high dividend yield stocks short low/no dividend yield stocks. Some sector
weight and value vs. growth concerns.
Best screen: 16.7% beta-neutral average returns, 1.11 sharpe ratio, lowest
turnover of all factors. Alphas for fractiles 1 and 5 11.6% and -7.7%, respectively.
Most consistent results: fractile 1 was top performer all but 2 years. Bottom fractile nearly
always 4 or 5. Consecutive losses in 1998 and 1999, but positive returns in all other years.
Forward looking: uses fiscal earnings estimates for two years out scaled by consensus long
term growth expectations. Go long high EY to growth fractile, short low EY to growth fractile.
A beta neutral long/short strategy resulted in an average return of 10% with a range of -11% to +37%. High Sharpe ratio of .78. There were four years of negative returns over the 20-year time period. Consecutive losses in 1998 and 1999.
Factor 1 Dividend Yield – fundamental data
Factor 2 FY2 Earnings Yield to Growth – expectational data
Two sorts produced 25 fractiles with ~20 companies each – long top fractile, short bottom
Trouble sorting in later years damages credibility of data.
Average beta-weighted return of 29% and sharpe ratio of 1.58 are exceptionally high.
Returns in bubble years range from 32%-58%. 2004 only year of negative returns (-8%).
Selected Book to Price, Dividend Yield, Earnings Yield (FY2) and Earnings Yield (FY2) to
growth. These factors combine both fundamental and expectational variables.
We subjectively chose scores, ranging from -5 to 5, for fractiles 1 and 5. Highest possible
Score is 12, lowest possible score is -9.
Beta-neutral average returns of 12%, sharpe ratio of .81; not as good as stand-alone
What if we’re right??