Quantitative Models Designed To Provide Risk-Adjusted Returns Over a Full Market Cycle

May 11, 2024

The psychological and financial impact of 20-40% market drawdowns can be devastating. That’s why utilizing quantitative approaches could be an intelligent way to protect capital and enhance returns when investing. These strategies aim to:

• Follow trending markets both up and down.

• Utilize cash as a strategic asset.

• Benefit from choppy markets that bounce around without really going anywhere.

• Compliment your existing traditional investment exposures.

Traditional investing has challenges in an increasingly macro-driven world:

1. Trends in housing market activity have been shown to be strongly linked to economic growth and stock market behavior, and this activity can be captured by trend-following strategies.
2. Stock selection strategies do not fully capitalize on macro factors. The biggest factor impacting the stock market is often linked to economic data, including PMIs. When PMIs are weak, the economy weakens, and stock prices often follow.
3. Anticipatory economic indicators including rising interest rates and the inversion of the yield curve often result in negative trends for the economy and stock market. Quantitative models can help to capture the volatility of this market behavior.

Balancing downside protection with opportunities for growth can be highly beneficial during volatile and uncertain economic times. To do so, they must react to market conditions, hedge against the downside, and follow and respond to trends in stock market behavior, and develop a plan for the future, taking both quantitative and intuitive approaches to capital preservation.

Quantitative models can benefit from uncertain economic times and a rapidly changing world. As macro factors related to housing and interest rates shift at a rapid pace, equity markets and the economy become more vulnerable to volatility.

Our Quantitative Strategies have Outperformed Other Strategies During Market Drawdowns

We offer a variety of quantitative models, each with different parameters, to capitalize on shifting trends and changing patterns of stock market behavior. Combined, these models have been shown to generate uncorrelated returns, with lower drawdowns, and the potential to generate positive returns when asset prices are falling.

These models emphasize drawdown reduction first and return second, utilizing multiple non-correlated and quantitative investment strategies. This approach often yields better returns because losses and drawdowns are minimized, versus simply going long on the market through a basket of stocks or ETFs. Severe market drawdowns can be devastating from a psychological and financial perspective, and this is what we are seeking to avoid. Losses during uncertain economic times can wipe out decades of investment profits generated in prior years.

Our strategies have navigated through historical market turmoil. They are highly uncorrelated to traditional investments, can mitigate potential drawdowns, and have been especially effective during periods of market volatility. Our models recognize that in an active risk-managed equity strategy, high levels of cash should be considered an investable asset. Other complementary strategies include mean reversion and momentum, offering the ability to capitalize on market trends.

Disclaimer: Advisory services are offered through Portfolio Medics. Views expressed by Gibson Capital are theirs alone. This summary is for informational purposes only and shall not constitute advice and are not an offer to buy or sell, or a solicitation of any offer to buy or sell investment products. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for your portfolio. All investment strategies have the potential for profit or loss and past performance is not a guarantee of future success. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Past performance is no guarantee of future performance or profitability. The types of investments discussed also do not represent all the securities purchased, sold, or recommended for clients. Stated information is derived from proprietary and nonproprietary sources that have not been verified for accuracy or completeness. While the firm believes this information to be correct, we do not claim or have responsibility for its completeness, accuracy, or reliability. The firm also assumes no duty to update any information in this presentation for subsequent changes of any kind.