The Miracle of Lowest Correlations in Action
To put it simply, I use a wide array of uncorrelated premiums. Each premium individually is as simple and reliable as possible, based on solid fundamental analysis. But unfortunately, it does not generate a large percentage of profitability.
Examples of trading premiums:
Return +9.1% CAGR, max drawdown 24.6%
Return +2.6% CAGR, max drawdown 9.9%
Return +8.1% CAGR, max drawdown 12.2%
As you can see, each strategy generates a very small return on its own. But when we combine them together, we can see the “miracle of lowest correlations” that I wrote about in this article.
3 premiums combined:
Return: +21.3% CAGR, max drawdown 15.9%
The main magic is that if we add up the max. drawdown of 3 premiums, the total drawdown is: 9.9 + 12.2 + 24.6 = 46.7%. However, if we combine them, it is much lower because the drawdowns for each premium occur at different times. So premiums stabilize each other!
But that’s not all! Let’s add up the annual premium returns: 9.1 + 2.6 + 8.1 = 19.8%. But when we combine the premiums, we see that the annual return has gone higher: +21.3%. That means we not only smoothed out the drawdowns, but we also got a 1.5% higher annual return than we should have! This is due to rebalancing and premiums fueling each other with compound interest. I wrote more about it in this article: (link, spy-tlt rebalancing).
That is, all we need is to find a large number of simple premiums, combine them correctly and reap the fruits of our labor, practically without doing anything. The market and mathematics will do all the work for us : )
Another source of uncorrelated premiums
Where else do I find premiums with returns over 20% per year? The answer is simple: in the futures spread market. Futures spreads do not throw off big annual returns, but trading them is extremely easy.
Here are examples of some futures spreads:
Chart since 1970. Buy at the bottom, sell at the top
Chart since 1985. The logic of this trading is the same and has not changed for decades!
The most important thing about trading spreads is risk control, because they can diverge a lot before converging again. But with proper risk management, the probability of this causing major problems is 0.0%. One of the most important rules is to take an extremely low risk and close it with an option off the top. Yes, in this case we won’t be able to earn more than 1-3% on each trade, but what if we have more than 10 such trades per year : )
With the right combination of factors and risks we get such yield profit curves:
Spread 1, 1981-2020
Spread 2, 1980-2020
Spread 3, 1976-2020
As you can understand, these returns are perfectly combined with the combinations at the beginning of the article. And now you should have no more questions about how I manage to consistently earn more than 25% in annual returns with relatively low risk.
You can find the mechanics of some of the premiums on the website in the “Articles” section.
The program of my education course in trading these premiums can be found here.
Reviews about the education course here.
Sign up for a free introductory Skype/Zoom lesson where I’ll reveal my trading grail and answer all your questions: contacts.