Contact Us
Hedgewise advisors are available to every potential client because you deserve to know and trust who is managing your money.
E-mail
Questions / Comments
SUBMIT
X CLOSE
Investments That Outperform
Thanks! Only $1,000,000 remaining.
You can help accelerate launch by referring a few friends.
X CLOSE
PERFORMANCE ABOUT BLOG LIVE 510-876-9473
CLIENT LOGIN
PERFORMANCE
ABOUT
BLOG
DEMO
CONTACT US
TOPICS
About Us
|
Account
|
FAQ
|
Investment Strategy
|
Market Commentary
|
September 2018: Amidst Volatile Markets, Hedgewise Leads the Pack
Posted in Market Commentary on 2018-09-04

Summary

  • Since the market bottom this spring, Hedgewise Risk Parity has gained 8% and Momentum has gained 10%, demonstrating the resilience of both frameworks and the power of remaining patient regardless of market conditions.
  • Generally, most quantitative and traditional frameworks have underperformed Hedgewise over this period, which can be traced to core theoretical principles that give Hedgewise a persistent edge.
  • While US equities have been the best performing asset class this year, substantial risks such as the trade war and rising interest rates remain. Protecting against these downside risks has resulted in a slight lag compared to the S&P 500, but that is entirely by design.

Few Winners in 2018 Amidst Market Chaos

If you look anywhere outside of US stocks, 2018 has been a pretty terrible year for investors. Both emerging markets and many commodities have entered a full-fledged bear market, and the general environment of heightened volatility led to many funds taking money off the table and missing the ensuing recovery. Bonds failed to hedge the market pullbacks in February and March given fears of runaway inflation, and other typical safeguards like gold were beaten down by a strong US dollar.

Performance by Asset Class, YTD

Source: Bloomberg, Hedgewise. Includes an estimate for all dividends and fees. Hedgewise performance is a composite of all live client portfolios in a given strategy and risk level.

Despite this difficult environment, both Hedgewise strategies have performed quite well, with Risk Parity up 5% (at the Max risk level) and Momentum up 7.3%. Given that both frameworks are frequently exposed to bonds and commodities, these results are quite powerful and add significant weight to the narrative that Hedgewise clients have no need to time the markets.

The challenges of navigating this kind of environment can be seen in the poor year-to-date performance across the majority of quantitative funds and even in traditional diversified portfolios:

Competitive Risk Parity Funds YTD Performance

Mutual FundYTD
AQR -2.9%
Invesco -1.1%
Wealthfront -6.8%
Source: Morningstar, Bloomberg. Includes an estimate for all dividends and fees.

Traditional Diversified Mix YTD Performance

Type (Ticker)YTD
Conservative (AOK) -0.9%
Moderate (AOM) -0.2%
Aggressive (AOA) 1.4%
Source: Morningstar, Bloomberg. Includes an estimate for all dividends and fees.

The outperformance of Hedgewise products can be traced directly to its hyper-focus on avoiding what is known as "asymmetric risk". Simply, this is when there's a chance that some part of your portfolio will perform badly in isolation, and nothing else in your portfolio offsets it. For example, normally a commodity crash would be accompanied by a rally in bonds, since it would suggest lower overall inflation. But this year, commodities have crashed while bonds have lost money as well. Similarly, international bonds would usually rally when international equities crash, but both are negative year-to-date.

The reason for both trends is that the US dollar has had an incredible rally this year, which lowers the value of international stocks and bonds as well as dollar-priced commodities. This is a classic asymmetric kind of risk, and it is exactly why Hedgewise avoids international exposure and has a measure for asymmetric risk built into every asset class.

However, Hedgewise clients are often less interested in comparisons to competitive funds and more interested in performance versus the S&P 500 itself. After all, the goal is to achieve equity-like returns (at the High and Max risk levels) with substantially less risk. Given that, I want to focus the rest of this analysis on how years like this current one fit into the bigger strategic picture, and why underperformance compared to equities is often exactly what you'd expect.

Risk Parity: Stability Above All

Risk Parity is all about balance; it accounts for every possible economic scenario, and constantly builds in a hedge for each. As a result, it will always be holding a mix of bonds, commodities, and equities. Thus, it is somewhat intuitive to achieve a return lower than equities when bonds and commodities are underperforming. But as soon as you hit one period of recession (when bonds usually rally) or high inflation (when commodities usually rally), you easily make up the difference.

The key is that you are constantly trading near-term upside for long-term stability; you'd rather have a boring, steady 8% return every year regardless of what equities are doing. The rub is that you'll probably underperform equities about 50% of the time! You can also run into lots of bull markets where you'll lag the net performance of the S&P 500 for many years. In exchange, you can worry much less about whether next year is going to be a repeat of 2008. Historically speaking, so long as you've waited at least 10 years, you've outperformed the S&P about 85% of the time at the High risk level and 99% of the time at Max.

Still, it is difficult to gauge the strategy's success in years like this one, as you wonder whether a simple stock portfolio might make sense. Fortunately, there is a way to directly measure the 'stability' effect even over shorter timeframes to gauge how well the theory is working.

The following chart shows the distribution of all daily returns of the S&P 500 thus far in 2018. Notice the long 'left-tail' of negative returns; you had to deal with a couple of single days with losses as high as 4%!

S&P 500 Daily Return Distribution, YTD

Source: Bloomberg, Hedgewise

Now let's look at the same distribution for the Risk Parity High strategy. If it is working as it should, the distribution should be much tighter, and have a shorter left-tail.

RP High Daily Return Distribution, YTD

Source: Hedgewise. Hedgewise performance is a composite of all live client portfolios in a given strategy and risk level.

Exactly as the theory predicts, the Risk Parity portfolio achieved a far higher level of stability compared to equities. The portfolio had more positive daily returns, and fewer negative ones; it also protected clients from the worst of the equity volatility. These attributes are what will continue to drive the portfolio's resilience over the long-run, though equity underperformance will very frequently be part of the story.

Momentum: Lean Into Safety, Away From Risk

Unlike Risk Parity, the Momentum framework does not rely on underlying balance. While it can hold various asset classes, it is usually dominated by equities, as its goal is to outperform the S&P 500 at a similar level of risk. To achieve this, it is constantly evaluating the current environment for stocks. When it is deemed relatively 'safe', the portfolio will overweight equities, and vice versa.

Importantly, this means that it will often be underweight stocks in risky environments, since this is what helps protect the portfolio from downside. Given the events of this year, perhaps it is little surprise that equity exposure has generally been lighter than it was in 2017.

The theory behind this is that stocks generally yield a positive return in 'normal' environments, since any reasonable investor demands that. However, once in a while, asymmetric risks appear to the downside (e.g. real estate bubble, dot-com crash, junk bond crisis, etc.). Hedgewise simply behaves more and more conservatively as the risk builds. Roughly speaking, Hedgewise trims exposure as the risk of a systemic event reaches between 20-30%; in other words, Hedgewise expects to be wrong about a crash occurring about 70-80% of the time.

To visualize the impact of this, the following chart isolates every year of gains in the S&P 500, and compares the returns of the Momentum "High" strategy over the same period. The dots under the red line mean the Momentum strategy did worse than equities, and vice versa.

S&P 500 Performance vs. MM High Performance, 1972 to Present (Only Stock Gains)

Source: Hedgewise. Momentum performance based on a hypothetical model that relies on the same algorithm used in live client portfolios. Data based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. See full disclosures at end of article.

It may initially be surprising to see so many years of underperformance! However, there are very compelling reasons to give up these gains. Notice that you tend to make much more in the good years than you lose in the bad ones, and there are also about 2x as many dots above the red line as below. Even more importantly, playing it safe allows you to avoid the occasional catastrophe, as you can see in a similar chart that isolates all of the years of S&P 500 losses:

S&P 500 Performance vs. MM High Performance, 1972 to Present (Only Stock Losses)

See disclosures in previous chart.

Because the strategy behaves so conservatively in risky environments, it has historically avoided about 90% of stock crashes. Essentially, this boils down to a philosophy of being aggressive in good times but cautious in dangerous ones; you lean into safety, but away from risk.

As a result, you'll frequently underperform the S&P 500 in volatile years like 2018, but the amount you give up will be relatively small compared to your outperformance in better years and your ability to avoid significant crashes.

Comparing this to the available live client performance, the Momentum "Max" product had a return of 31% in 2017 compared to 22% in the S&P 500, or a difference of +9%. Year-to-date, it has a return of 7.3% compared to 9.9% in the S&P 500, or a difference of -2.6%. This is exactly consistent with expectations! Last year's outperformance more than outweighs the lag of this year, and while a more significant crash didn't wind up occurring, the risks were high enough to demand caution.

Looking Forward: Not Chasing the Peak

Perhaps the most consistent theme of 2018 is that the world feels much less steady than it did last year. The Fed is threading a nearly impossible needle of controlling inflation without impeding growth, and no one quite knows what to make of the ongoing trade wars. Various emerging markets are on the brink of crisis, and the Chinese economy suddenly appears quite vulnerable.

None of these risks have weighed much on the US economy so far, and it's entirely possible that they never will. But it feels increasingly likely that we are near a peak, and dangerous to try and predict its top. Luckily, there's no need to do so with either of the Hedgewise frameworks. Clients have continued to accrue gains regardless of external market conditions and have vastly outperformed most competitive funds. While there has been slight underperformance compared to the S&P 500, this is quite consistent with theoretical expectations. So long as you stay the course, the odds remain heavily tilted in your favor.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

Best-In-Class Risk Parity Performance
Posted in Investment Strategy on 2018-06-08

Summary

  • The Hedgewise Risk Parity product has outperformed competitive funds by an average of 4.2% in 2018 and 3.3% annually since 2016
  • While 'smart beta' products like Risk Parity share a common philosophy, performance can significantly differ due to the strategic and operational approach
  • By stripping down the core financial theory to its most essential benefits at the lowest possible cost, Hedgewise has emerged as an industry pioneer and generated consistent outperformance for its clients

A Framework for Evaluating Hedgewise

Two core ideas drive the investment product philosophy at Hedgewise:

  • Financial theory can be used to engineer higher returns with lower risk, and
  • Great care must be taken during implementation to ensure the concepts are properly represented at a reasonably low cost

To evaluate the first idea, the focus must be on how a broad theory is supposed to work, and whether those assumptions can be validated in the real world. This is the substance of a majority of the research published here, but can only really convince you of whether 'smart beta' concepts like Risk Parity make sense in general. In that regard, it's not as much of a judgment on Hedgewise itself as on the theoretical frameworks being used.

However, the implementation of these frameworks is far more nuanced than constructing indexes like the S&P 500. Managers face questions like how to define risk, how many assets to include in the portfolio, and how often to trade. If the answers are too complex, they can often drive up costs. If the answers are too simple, they can fail to properly implement the theory. These issues will dramatically impact performance across managers.

Given that, the simplest and most direct way to evaluate Hedgewise is to compare its long-term performance to other competitive funds. This is now easy to do for Risk Parity, as there are three large competitive mutual funds (AQR, Invesco, and Wealthfront). Note that Hedgewise data is based on a compilation of live client portfolios at the High risk level, which had the closest level of overall volatility to the other funds, and includes all costs and fees.

Performance Summary Since 2016

YTD20172016Ann.
Hedgewise1.7%18.2%10.8%12.9%
Avg. Competitor -2.5% 13.1% 10.5% 9.6%
Diff. +4.2% +5.1% +0.3% +3.3%

Breakdown by Fund

YTD20172016Ann.
Hedgewise1.7%18.2%10.8%12.9%
AQR -0.9% 16.2% 11.2% 10.0%
Invesco 1.3% 10.0% 9.7% 9.1%
Wealthfront -8.0% N/A N/A N/A
Data as of end-of-day on June 5, 2018. Mutual fund data from Morningstar. Wealthfront fund launched in January 2018. Includes all dividends re-invested, costs, and fees. Current strategy model use began in 2016; an older model was used in 2015 and performance was close to even with competitive funds.

Hedgewise has beaten the competition by over 3% annually since 2016. Over a ten year horizon, this would lead to additional total gains of over 70%.

However, the key to establishing whether Hedgewise deserves credit for this outperformance is to examine the shape of the competitive performance curves. It isn't enough to simply generate a higher return; this must be accomplished strictly within the Risk Parity framework. If the performance of one manager deviated too significantly from the rest, it would suggest that some driver besides the core theory - like manager discretion, for example - was playing an outsized role. This would naturally diminish the benefits of the underlying strategy framework, and introduce new risks to the portfolio that have no relation to Risk Parity itself.

Performance Curves Since 2016

Data as of end-of-day on June 5, 2018. Mutual fund data from Morningstar. Wealthfront fund launched in January 2018. Includes all dividends re-invested, costs, and fees.

Hedgewise performance is fairly clustered against the competition over the short-term but with a clear edge that widens over the long-term. This kind of pattern is very close to ideal, as it suggests that the Hedgewise approach is successfully capturing the essence of Risk Parity in a superior way.

This is unsurprising since Hedgewise broadly charges lower fees and incurs fewer expenses on behalf of its clients. However, this approach can go quite badly if a manager oversimplifies too much or fails to invest the resources needed to properly define theoretical concepts. Finding this balance is the key to the success of any smart beta product: it must be simple enough operationally, but still conceptually robust.

The relative performance of Hedgewise over the past few years suggests that it has struck just the right balance and provides a tremendous sense of validation. Let's take a deeper look at the core elements of the approach, and how those differ from the competition.

The Difference in Approach

To minimize operational costs, Hedgewise sought to reduce any kind of complexity that would create little or no net benefit. This raised some very significant theoretical questions, like how much value might be gained from investing globally vs. domestically, or from adding more exotic asset classes to the portfolio mix. Research suggested that so long as you had a very accurate understanding of how to define risk itself, you could successfully run the strategy in one single country and with a relatively basic mix of assets. Yet before Hedgewise was founded, this had never been tested and was vastly different from the approach taken by competitive managers.

With the performance now validated, it seems obvious that these concepts are similar to what gave rise to passive investing in the first place. For example, the idea that you don't need to independently value every stock to still include it in a portfolio, or that holding 1,000 stocks instead of 100 doesn't make much difference. Hedgewise is simply refining similar kinds of concepts as they apply to Risk Parity.

However, unlike strictly passive investments such as the S&P 500, smart beta products tend to have more complex dimensions and more theoretical unknowns. For example, the definition of risk plays an enormous role in the Risk Parity framework, and there is no broad consensus on exactly what 'risk' means nor how to calculate it for different asset classes. Defining risk intelligently requires significant research and expertise, and there are many potential performance pitfalls if this is done poorly.

The new Wealthfront Risk Parity fund provides a useful case study. In its white paper, Wealthfront outlines an approach to defining risk that largely equates it with volatility, or how much an asset tends to move up or down every day. However, a key pitfall to this approach is that risky asset classes like equities often have long periods of low volatility. A volatility-driven framework might misinterpret this to mean that stocks have become 'low risk', and then become more vulnerable whenever risk returns.

This pattern would tend to result in losses especially during periods of elevated, choppy volatility - just like the year-to-date pattern in equities thus far in 2018. Though it can't be determined if this is precisely what has happened with Wealthfront since launching this year, its performance is quite consistent with the theoretical outcome. Note that the performance of AQR and Invesco was clustered closely to Hedgewise and omitted for readability.

Wealthfront vs. Hedgewise Risk Parity Daily Performance, 2018 YTD

Data as of end-of-day on June 5, 2018. Mutual fund data from Morningstar. Wealthfront fund launched on January 29 2018. Includes all dividends re-invested, costs, and fees.

Whether this differential was driven solely by the definition of risk, or some other combination of factors, the most important takeaway is that certain assumptions can have a huge impact on what Risk Parity means and how it performs. Even if the theory itself is entirely valid, different managers will still achieve different results. This is a natural hurdle in the smart beta space, since this makes it harder to separate the strategy from the manager.

Yet these challenges have also provided Hedgewise with the opportunity to demonstrate how powerful the approach can be when it is done well. Risk Parity has tremendous theoretical possibility, but that is diminished if the portfolio is burdened with complexity, expense, or misunderstanding.

Looking Ahead: The Evolution of Smart Beta

The idea of smart beta is still in its relative infancy, but one of the clearest themes to emerge thus far is that the broad ideas can be implemented in dramatically different ways. Some of the lessons from the rise of passive management, like prioritizing simplicity and low-cost, continue to resonate and have formed the basis for much of Hedgewise's outperformance over the past few years. However, it's also obvious that the underlying strategies involve some degree of subjectivity. Over the long-run, any smart beta product will only outperform if there is a real theoretical basis for how it works and a fairly accurate understanding of how to capture the benefit.

It's incredibly exciting to be at a point where there is enough data to identify Hedgewise as a clear leader in Risk Parity, and to see its balanced approach yield exactly the kind of benefits that were predicted.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

Can You Time Risk-Managed Strategies?
Posted in Investment Strategy on 2018-04-17

Summary

  • Many clients wonder whether they should adjust their approach depending on market conditions
  • However, risk-managed strategies are constantly responding to the current environment, such that attempts at timing are usually counterproductive
  • After a quick review of why this is consistent with the underlying theory, I'll analyze a few of the most common "timing" questions to see if they have any merit:
    • Should I wait to put cash to work until after a period of large losses?
    • Should I take cash off the table after a period of large gains?
    • Should I invest elsewhere if I think an equity or bond bear market is approaching?

Risk Management versus Timing

If inflation, trade wars, data leaks, slowing global growth, or government instability has given you pause on the investment outlook, you are certainly not alone. It's hard not to wish that you had just sold everything in January, or not to wonder whether you should still sell everything now. The good news is that Hedgewise frameworks have already shifted to account for these market conditions, and the future outlook remains excellent. The bad news is that you will still likely wonder whether you can time it better yourself, but fortunately we can look to the theory and data for guidance.

While Hedgewise runs two different risk-managed frameworks - Risk Parity and Momentum - they are rooted in the same core financial principles:

  • Investors generally expect a positive return on their investments, so in normal environments, markets appreciate over time
  • Diversification across different kinds of assets, like stocks and bonds, reduces risk by offsetting short-term gains and losses
  • As market risk goes up, so does the probability of large gains or losses

Hedgewise then uses financial engineering, like leverage and risk balancing, to most effectively apply these concepts to its products.

Note that none of these principles require you to figure out whether assets are over- or under-valued, which tends to be incredibly difficult. This kind of "timing" usually backfires because it requires that you know the exact right time to enter or exit. One of the main reasons that risk management is effective is because it avoids the need for such precision.

When relying on the relatively simple principles above, the focus shifts away from short-term returns and towards long-term stability and loss reduction. When this is done intelligently, it means your portfolio is constantly maximizing the odds in your favor. Positive returns are always more likely than not, even in the worst of market conditions.

Clients often find this counterintuitive because 1) it seems impossible that return expectations would be positive if markets are about to collapse, and 2) risk-managed strategies still undergo periods of loss, which in theory might be timed. However, because these periods of loss are driven by the relationships between different assets and their volatilities, they often have little to do with bear markets. For example, both Risk Parity and Momentum wound up with calendar year gains during four of the last five major stock crashes.

Put another way, to time a risk-managed strategy, you'd need to be able to predict when fundamental asset relationships and risk indicators are about to breakdown in conjunction with a major market crash - a tall order indeed! These kinds of events tend to be quite sudden, random, and short-lived by definition.

Now, it is true that the probabilities of gain or loss do shift in certain market conditions - for example, you have a better than normal chance that risk-managed strategies will do well after a period of loss. But in waiting around for a loss to happen, you'll probably miss substantial gains in the meantime. No matter which way you cut the scenario, the same theme arises: it's tremendously difficult to beat the simple approach of buy-and-hold.

Scenario 1: Waiting for a Loss

It's far easier to invest with confidence when assets look cheap, and many prefer to wait on the sidelines until after some kind of crash. This is always a tricky topic because, in hindsight, it's true that you make more money if you buy low, and cash also carries great comfort for the risk averse. The problem is that risk-managed strategies are hedged across many different kinds of assets, so a crash in a single market often doesn't result in net losses to the portfolio.

As an illustration, here are the rolling 1yr returns since 1972 for Risk Parity High, Momentum High, and a 50/50 split between the two.

1yr Rolling Returns By Strategy Since 1972

Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. Includes an estimate for Hedgewise fees of 0.7%. See full disclosures at end of article.

Depending on your strategy mix, you've historically had about a 6-10% chance of incurring a loss over the following 12 months, or conversely a 90-94% chance of incurring a gain. Most of these losses were also fairly minimal; there was a less than 2% chance of incurring a loss of 10% or more.

That said, you may still figure that waiting for one of these periods still bumps your odds up further, and you'd be right: if you happen to start after a twelve-month loss, your historical odds of a subsequent gain go up to over 98%. But the question is not whether the odds improve, but rather if it makes sense to wait around for that to happen.

A simple way to answer this question is to calculate a "breakeven point" in time. That is, the date where the gains you would have accrued before the subsequent drawdown were greater than the drawdown itself. This assumes that you also had the magical ability to invest right at the exact bottom of each pullback. Performance is drawn from the 50/50 split portfolio (though RP/MM alone show similar numbers).

If you got in at the exact bottom in.. You'd still be worse off than if you started..
Jun 19787 months earlier
Sept 198117 months earlier
Jun 19848 months earlier
Aug 198823 months earlier
Sept 19905 months earlier
Nov 199417 months earlier
Aug 20012 months earlier
Jan 20164 months earlier
Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. See full disclosures at end of article.

On average, you lost about 10 months' worth of gains. In other words, to successfully take advantage of an upcoming period of losses, you need to a) correctly identify the 10% chance that losses are going to occur at all, b) be pretty sure it's not more than 10 months away, and c) know exactly when the drawdown hits bottom. If you fail on any single one of these conditions, you'd be better off investing now rather than waiting.

That said, there are understandable exceptions: you may keep a discretionary pool meant for more opportunistic investing, you may have new savings become available at a distinct point in a year, or you may be quite confident in your ability to foresee an upcoming loss. In these cases, you'd like to know when the probabilities for a near-term gain are the most favorable.

One way to study this is to compare the size of any current drawdown in the strategy framework to the subsequent returns. Performance is drawn from the 50/50 split portfolio, but RP/MM alone again show similar numbers.

Forward Return of the 50/50 Split Portfolio for Various Timeframes, by Size of Drawdown

Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. See full disclosures at end of article.

Interestingly, even drawdowns as small as 3% substantially increased the size of future returns. While it might seem tempting to wait and capitalize on the bigger losses, they are extremely infrequent: the last 15% drawdown happened in 1988. A more reasonable target would be anywhere in the 5-10% range, which you'll usually see every other year or so. But remember, if you sit in cash for more than a couple of months, you'll probably miss more gains than even a successful timing attempt will recoup.

Applying this analysis to today, we experienced a drawdown in the 50/50 strategy of around 10% from January 26th through February 8th. Historically speaking, there's around a 95% chance we are already past the bottom. While there's been some recovery since then - the current drawdown is now more like 7% - it is still quite an attractive time to invest if you happen to be sitting on cash.

Scenario 2: Selling After Gains

Looking back, it seems obvious that the initial fast gains in January were signs of overheating, and to wonder whether there was a way to identify that beforehand. However, nothing in the underlying theory suggests that gains of a particular size or speed should be worrisome. After all, we expect gains to happen 90% of the time, and the techniques of hedging and risk management are always limiting the impact of an individual asset bubble or crash. To test this, we can compare short-term gains in the 50/50 strategy to subsequent historical returns. To further isolate "overheating" scenarios, this data is also limited to months in which there was no recent drawdown.

Forward Return of the 50/50 Split Portfolio for Various Timeframes, by Size of Prior 1 Month Gain

Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. See full disclosures at end of article.

This data shows no indication that large gains typically precede losses. In fact, quite the opposite: forward-looking returns often increase instead! Digging into the numbers, it is unsurprising to learn that you see clusters of great returns in the middle of broad, calm bull markets - years like 1997, 2006, or 2017. In these periods, when you had a fantastic one-month gain, you typically went on to have many more of the same. This same pattern shows up using prior three-month, six-month, and one-year gains as well; there's simply nothing to suggest that big positive returns frequently reverse.

If a risk-managed strategy is implemented well, this is what you'd expect. While individual asset classes like equities may become "irrationally exuberant", such risks are explicitly built into the frameworks and minimized. Though occasional drawdowns are inevitable, they tend to be quite random, and certainly have nothing to do with recent performance trends.

Scenario 3: Timing Bear and Bull Markets

The final timing question that many clients wonder is: what if it is just a bad time to be invested in general? For example, if you knew that bonds and/or stocks were going to do poorly for the next year, wouldn't you be better off exiting?

Even if you had the ability to correctly forecast an upcoming downturn, that wouldn't necessarily mean that risk-managed strategies make a bad investment. Returning to the theory, different asset classes will perform differently depending on the underlying economic environment. For example, in a recession, gold and bonds will tend to rally while stocks will tend to fall. So long as these relationships hold up as expected, risk-managed strategies should be quite resilient against individual asset crashes.

To test this, we can examine the performance of the 50/50 split portfolio in the worst-performing stretches for both stocks and bonds. Starting with equities, the following table displays tranches of every rolling one-year period of losses in the S&P 500 since 1972 and summarizes how the 50/50 split portfolio performed over the same periods. Note that the "% Gain" and "% Loss" columns display the number of data points when the 50/50 portfolio had either a gain or loss out of the total number of data points within tranche.

Rolling 1yr Performance of the 50/50 Split Portfolio During Equity Drawdowns

50/50 Split Performance
S&P 500 1yr Loss Avg.% Gain% Loss
0-5% Loss +5.4% 67.7% 32.3%
5-10% Loss +4.3% 69.6% 30.4%
10-15% Loss +7.6% 87.5% 12.5%
15-20% Loss +9.8% 90.9% 9.1%
20-30% Loss +8.7% 94.1% 5.9%
Over 30% +14% 88.9% 11.1%
Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. See full disclosures at end of article.

In every single tranche, you averaged gains in the 50/50 split despite losses in the S&P 500. Your odds of a gain also significantly increased along with the size of the equity pullback. This is because risk-managed strategies tend to minimize equity exposure as losses increase, while safe-haven assets like bonds and gold rally. In fact, the strategies tend to be most vulnerable to "small" losses (under 10% or so) that occur when the market is still trying to "figure things out". For example, in our most recent pullback, bonds and gold have not rallied much despite the pullback in equities because it is not yet certain that a recession is imminent. Of course, these short periods are all the more difficult to time!

Now let's repeat these same numbers for bonds to make sure the story is consistent. Note that the loss ranges had to be reduced compared to equities as bonds are far more stable.

Rolling 1yr Performance of the 50/50 Split Portfolio During Bond Drawdowns

50/50 Split Performance
10yr Treasury 1yr Loss Avg.% Gain% Loss
0-1% Loss +10.2% 87.5% 12.5%
1-2% Loss +13.5% 88.2% 11.8%
2-3% Loss +16% 93.3% 6.7%
3-4% Loss +14.1% 91.7% 8.3%
4-5% Loss +12.9% 83.3% 16.7%
Over 5% +9.2% 74.3% 25.7%
Data based on hypothetical models using end-of-day index data since 1972. All dividends are included and assumed re-invested. See full disclosures at end of article.

Bonds exhibit a similar story, though you do see slightly lower (albeit positive) returns for losses of over 4%. Many of the data points in this upper range come from periods of high inflation, during which both stocks and bonds tend to do poorly while commodities provide a hedge. This presents less opportunity for net upside as commodities are naturally a smaller portion of the portfolios. At worst, though, you averaged a 9.2% annual return and a 75% chance of gains.

Summing up the numbers, it really didn't make sense to avoid risk-managed strategies even if you had perfect insight about upcoming equity and bond pullbacks. Your worst-case returns were around 4-5% during smaller equity pullbacks, while in all other cases you achieved returns of 8% or more. Those are pretty stellar numbers in years of very rocky markets.

Conclusion: Staying the Course, Expecting a Few Bumps

Put simply, risk-managed strategies are really effective at dealing with worst-case scenarios. They assume that bubbles and crashes are part of the norm, but since this logic is already built-in, you can't apply traditional thinking like how to "get out at the top" or "get in at the bottom". Neither a stock crash nor a bond crash will necessarily result in losses; more often, the portfolio is vulnerable to quick pullbacks or markets that have a great deal of uncertainty. Even if you could time these situations, the losses are usually pretty small and not worth the headache of figuring out when to re-enter. If you try to time unsuccessfully, the gains you miss quickly outweigh any potential benefits.

None of this is to suggest that these frameworks are invulnerable, but rather that the probabilities are enormously in your favor if you invest early and stay patient. You will certainly have a few situations where this patience is tried: you may underperform the S&P 500 for stretches of time, hedges will fail to work in certain situations, and markets will sometimes be blindsided by the unpredictable. Despite all of that, there is an extraordinarily high chance that you will go on to perform wonderfully if you simply shrug your shoulders.

For discretionary pools, you've generally found good entry points during drawdowns of 5-10% or during periods of consistently large gains, regardless of surrounding market conditions. That said, if you don't currently have better uses for your discretionary funds, or if in reality you are just trying to optimize the entry point for your broader portfolio, the best path is almost certainly the simplest: invest now at your long-term risk level, and don't worry about the timing.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

February 2018: Why Not to Panic When Markets Go Crazy
Posted in Market Commentary on 2018-02-12

Summary

  • Hedgewise has incurred losses of 5-10% since late January, depending on your product and risk level, but is only down slightly year-to-date and continues to outperform all major competitors.
  • Much of the drawdown has been driven by simultaneous losses across all asset classes, which strongly suggests investor panic and confusion. Such scenarios have never lasted long historically and will likely soon reverse.
  • Even if some of the worst-case scenarios come true, like stronger than expected inflation or a recession, both Hedgewise frameworks have held up well in such environments.

Stay Calm and Carry On: Putting Recent Losses in Perspective

Make no mistake: markets have been pretty wild for the past couple of weeks, and if it's started to make you nervous, you are human after all! It has been especially confusing because the swings are quite hard to explain: not all that much has changed in the economy since January, yet markets are suddenly terrified of inflation, government debt, volatility, and valuations. If you can't explain why people are selling now, it's also hard to predict when they will stop.

Since every investor on the planet has this same logic and fear, it's easy to see how it can all quickly turn into a frenzy. And yet, this story also justifies why short-term market volatility shouldn't worry you much at all. If people are panicking for no good reason, you can be almost certain that they are selling assets too cheaply, and that's really the worst possible time to change your approach.

It helps to return to the basics of investment theory, which I discussed in my previous newsletter. Recall that your expected returns should look something like the following, with the blue line being your realized month-to-month returns, and the orange being the underlying "risk premia" - or "fair value" - that you are accumulating over time.

If you look at the past two weeks or so, we've most likely just experienced a very rapid cycle of this diagram, with assets moving temporarily above their fair value and now back below. The reason this is not particularly concerning is that it has no effect on your expected return over time, so long as you simply wait. By focusing primarily on long-term returns, you also minimize the many pitfalls of short-term timing and active management.

Now, Hedgewise still applies various kinds of risk management, but it is all with this long-term focus. For example, balancing exposures across many different assets, like stocks and bonds, tends to minimize the impact of a crash in any single one. But in the span of a few days or weeks when investors are panicking, it is possible they will all move down together. Likewise, there are certain extreme risk environments, like recessions and hyperinflation, that can sometimes be detected beforehand. But short-term market swings most often have very little to do with the economy at all.

With this perspective, the Hedgewise frameworks have continued to be quite effective. For example, since the beginning of 2018, the Hedgewise Risk Parity framework has lost significantly less than comparable major mutual funds. This continues a clear trend of outperformance ever since Hedgewise was launched. Last year, the Hedgewise Risk Parity and Momentum products both significantly outperformed the S&P 500 at the Max risk level, yet neither has lost significantly more than the S&P 500 so far this year.

Periods like these past two weeks will always be uncomfortable, but short-term losses are very different than long-term risk. To further make this case, let's take a deeper look at recent performance trends and how they stack up against history.

2018 Year-to-Date Performance: Unavoidable Losses, But Better Than the Competition

While most of the news is focused on stock returns since the peak on January 26th, equities were up almost 8% before they gave it all back. Trying to make sense of this fast of a reversal doesn't serve much purpose. The more interesting story is how various asset classes have performed year-to-date overall:

2018 Year-to-Date Performance By Asset Class

Hedgewise data based on various end-of-day index prices and include an estimate for all dividends. Data as of Feb 9th, 2018.

The bond market has actually been in a more significant correction than equities, as long-term yields have jumped about 0.7% since last September and 0.5% in the past two months alone. This makes some sense, given the Fed has started to more rapidly raise rates and reverse the "Quantitative Easing" program, and Hedgewise risk indicators have been frequently spiking as a result, including last month. The effectiveness of this dynamic risk management can be most easily seen by comparing the performance of the major Risk Parity mutual funds.

Performance of Hedgewise RP High vs Major Risk Parity Mutual Funds, 2018 Year-to-Date

Data based on publicly available quotes for AQRNX and ABRYX and include an estimate for all dividends. Hedgewise data is an average of all client performance in the RP High product and includes all costs and fees.

The graph continues to demonstrate a high correlation between the various risk parity products, since they are all investing in the same broad asset classes. The main difference is in how risk is balanced, and Hedgewise has consistently achieved a superior level of performance in the short and long-term, as demonstrated by its comparative performance back through the beginning of 2017.

Performance of Hedgewise RP High vs Major Risk Parity Mutual Funds, 2017 to Current

Data based on publicly available quotes for AQRNX and ABRYX and include an estimate for all dividends. Hedgewise data is an average of all client performance in the RP High product and includes all costs and fees.

While the relative performance is excellent, why hasn't any Risk Parity framework been able to better hedge this equity correction? If you glance back at the year-to-date performance across asset classes, you'll notice that bonds, commodities, and stocks have all incurred losses simultaneously. In such an environment, there's really no way to avoid a loss unless you engage in very short-term timing (quick reminder: all active managers do some form of this, and over 90% of them underperform the S&P 500).

This kind of cross-asset correlation is somewhat exceptional, especially during a 10% equity correction, though not entirely unprecedented. Since 1970, there's been exactly four other scenarios where equities have lost 8% or more while safe havens like gold and bonds also suffered losses.

DateEvent
Jul 1974Beginning of Stagflation
Dec 1980End of Stagflation; Interest rates peak near 20%
Oct 2008Beginning of Great Recession
Mar 2009Great Recession Market Bottom

While these are some pretty scary events, the good news is that Hedgewise frameworks still did fine in all of these scenarios because safe havens eventually kicked in. Let's take a deeper look at how it unfolded.

When Safe Havens Fail: Why It Happens and What It Means

There are only two reasons that investors sell stocks, bonds, and commodities at the same time: either they are in full panic, or they are really confused about inflation. The Great Recession was a great example of 'sell everything' when Lehman went bankrupt. People just moved to cash in a mix of confusion and a need for liquidity. Gold was the logical hedge against a failing financial system, and it went on to rally by 30% by February 2009, but it often won't hold up at the outset.

Stagflation is the other culprit, since it means poor economic growth due to runaway inflation. Both stocks and bonds will lose money by definition (since higher inflation means higher interest rates). While real assets like commodities should do well since the dollar is losing its value, there's often an initial fear that the Fed will pre-emptively raise rates to fight inflation even if it will result in a recession. Ironically, a recession would then mean lower interest rates, so then bonds would actually rally, but you can see how everyone basically gets scared and confused!

In each of these scenarios, equities, bonds, and gold all fell together for a couple of weeks. To see how it eventually played out, though, I looked at the full one year return for each asset class following each event.

One Year Return by Asset Class After Initial Event

Date Stocks Gold Bonds
Jul 1974 15.2% 16.4% 5.6%
Dec 1980 -2.8% -36.6% 11.6%
Oct 2008 -9.2% 14.1% 7.7%
Mar 2009 62.3% 18.8% -2.7%
Data based on publicly available end-of-day index prices and include an estimate for all dividends assumed re-invested.

What's really neat is that you can see all of the different possibilities unfold. While these were all pretty awful economic times, at least one of the asset classes eventually rallied. It's the laws of economics at work.

It's also helpful to look at how the Hedgewise models did over this same one year period after each initial event.

One Year Return by Hedgewise Model After Initial Event

Date RP Max Momentum Max
Jul 1974 9.8% 14.3%
Dec 1980 -4% 41.5%
Oct 2008 20.4% 6.7%
Mar 2009 22.1% 38.2%
Hedgewise models based on hypothetical simulations using end-of-day index prices and assume all dividends are re-invested. See full disclosure at end of article.

The big idea is that markets work themselves out over time, and that is eventually captured in the Hedgewise frameworks. You can still wind up with some bad years, and performance won't always bounce right back. But the odds are always on your side, perhaps even more so right after the scariest kind of market behavior.

Wrapping Up

While hopefully it's clear that there's no need to panic, whether losses have already bottomed or not, these past couple of weeks are still a wonderful opportunity to reflect on your own goals and risk tolerance. Investing presents a natural conflict between logic and fear. Rationally, targeting a higher long-term return seems like the right choice for many clients, despite the warning that a 20-30% loss is basically inevitable at least once a decade (at the higher risk levels). Yet it can feel quite different in the past couple of weeks when you see 10% disappear, and that's not even a particularly severe event!

On the other hand, the RP Max and Momentum Max product returned about 27% and 31%, respectively, in 2017 alone. Even if losses continue and this is the year of a 30% drawdown, you'd only be slightly worse off than if you had held cash the past year. It all depends on your perspective. Whether next month or next year, the drawdown will eventually come. If you remain patient and calm, it will also almost certainly pass. Either way, this most recent experience should help prepare and inform you.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

How to Link an Existing Interactive Brokers Account
Posted in Account on 2017-12-05

If you already have an account with Interactive Brokers, linking up to Hedgewise is fairly simple. To begin, IB offers two interfaces for Account Management: "New" and "Classic".

Click the image below that looks more like your home screen, and you will be directed to the correct guide.

New Account Management

Classic Account Management

Interactive Brokers Disclosure

Interactive Brokers LLC is a registered Broker-Dealer, Futures Commission Merchant and Forex Dealer Member, regulated by the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), and is a member of the Financial Industry Regulatory Authority (FINRA) and several other self-regulatory organizations. Interactive Brokers is not affiliated with and does not endorse or recommend any introducing brokers or financial advisors, including Hedgewise Inc. Interactive Brokers provides execution and clearing services to customers of Hedgewise Inc. For more information regarding Interactive Brokers, please visit www.interactivebrokers.com.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

How to Link an Existing Interactive Brokers Account - New AM
Posted in Account on 2017-12-05

Step 1: Check Your Financial Information

Regulations require you to confirm the trading goals and investing experience of Hedgewise acting as your advisor.

1) Log-in to Interactive Brokers and navigate to Settings -> Account Settings -> Financial Information.

2) Update your Investment Objectives to be "Growth", "Hedging", and "Trading Profits". Indicate your Investment Experience in Stocks and Options as >10 Years, >100 Trades Per Year, and Extensive Knowledge.

3) Press "Continue" and confirm any remaining steps. If you needed to change this information, you may have to wait 24 hours for this change to be processed before continuing to Step 2.

Step 2: Check your Account Type

Hedgewise requires the use of a 'margin' account, which helps avoid trading delays due to settlement procedures and gives you the ability to trade options contracts as needed. To check and/or change your account type, follow these instructions:

1) Navigate to Settings -> Account Settings -> Account Type.

2) Set your Account Type as either "Margin" or "Reg T Margin". If you also need to change your trading permissions, select "Yes" below Account Type and proceed to Part 2 of Step 3. Otherwise, select "No".

3) Press "Continue" and confirm any remaining steps to upgrade your account.

Step 3: Check Your Trading Permissions

Your account trading permissions must match those of Hedgewise for regulatory reasons.

1) Log-in to Interactive Brokers and navigate to Settings -> Account Settings -> Trading Permissions (near the bottom of the screen).

2) Select "Stocks - United States" and "Options - United States." Press Continue.

3) On the following screen, you may be asked to indicate your experience with these products. Choose >10 Years Trading, >100 Trades Per Year, and Extensive Knowledge. This reflects the experience of Hedgewise as your advisor.

Step 3: Link Account to Hedgewise

Note that this step is not necessary if you set-up your account through an e-mail invitation from Hedgewise. You will also not be able to link any account that is already managed by another advisor.

1) Navigate to Settings -> Account Settings. In the Configuration panel on the right side of the screen, click the icon next to Create, Move, Link, or Partition an Account.

2) Select the radio button next to Move my Entire Account to an Account Managed by an Advisor or Broker, and then click Continue.

3) Enter our Advisor Identification information as follows:

Account ID: F1415661

Account Title: Hedgewise Inc

4) Click Continue and complete the remaining forms.

Interactive Brokers Disclosure

Interactive Brokers LLC is a registered Broker-Dealer, Futures Commission Merchant and Forex Dealer Member, regulated by the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), and is a member of the Financial Industry Regulatory Authority (FINRA) and several other self-regulatory organizations. Interactive Brokers is not affiliated with and does not endorse or recommend any introducing brokers or financial advisors, including Hedgewise Inc. Interactive Brokers provides execution and clearing services to customers of Hedgewise Inc. For more information regarding Interactive Brokers, please visit www.interactivebrokers.com.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

How to Link an Existing Interactive Brokers Account - Classic AM
Posted in Account on 2017-12-05

Step 1: Check Your Financial Information

Regulations require you to confirm the trading goals and investing experience of Hedgewise acting as your advisor.

1) Log-in to Interactive Brokers and navigate to Manage Account -> Account Information -> Details -> Financial Information.

2) Update your Investment Objectives to be "Growth", "Hedging", and "Trading Profits". Indicate your Investment Experience in Stocks and Options as >10 Years, >100 Trades Per Year, and Extensive Knowledge.

3) Press "Continue" and confirm any remaining steps. If you needed to change this information, you may have to wait 24 hours for this change to be processed before continuing to Step 2.

Step 2: Check your Account Type

Hedgewise requires the use of a 'margin' account, which helps avoid trading delays due to settlement procedures and gives you the ability to trade options contracts as needed. To check and/or change your account type, follow these instructions:

Log-in to Interactive Brokers and navigate to Manage Account -> Settings -> Configure Account -> Account Type. Make sure your account type is labeled either "Margin" or "Reg T Margin".

Navigate to your Account Type

Set your Account Type as either "Margin" or "Reg T Margin".

Confirm any remaining steps to upgrade your account.

Step 3: Check Your Trading Permissions

Your account trading permissions must match those of Hedgewise for regulatory reasons.

Log into Account Management and select Manage Account -> Trade Configuration -> Permissions.

You will be presented with a matrix listing the product types offered (e.g., stocks, bonds, options, futures, etc.) along with the countries in which trading in those products is offered. Make sure that only "US - Stocks" and "US - Options" are selected.

On the following screen, you may be asked to indicate your experience with these products. Choose >10 Years Trading, >100 Trades Per Year, and Extensive Knowledge. This reflects the experience of Hedgewise as your advisor.

Step 4: Link Account to Hedgewise

Note that this step is not necessary if you set-up your account through an e-mail invitation from Hedgewise. You will also not be able to link any account that is already managed by another advisor.

On the top menu, navigate to Manage Account -> Add or Link Accounts -> Advisor/Broker Account Setup.

Select Move my entire account to an account managed by the Advisor/Broker identified below.

Enter our Advisor Identification information as follows:

Account ID: F1415661

Account Title: Hedgewise Inc

Your personal Hedgewise advisor will confirm your account linkage request within 24 hours. Account links are processed every Friday. Typically the first trades in your account will happen the following week, or as soon as your funds clear.

Interactive Brokers Disclosure

Interactive Brokers LLC is a registered Broker-Dealer, Futures Commission Merchant and Forex Dealer Member, regulated by the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), and is a member of the Financial Industry Regulatory Authority (FINRA) and several other self-regulatory organizations. Interactive Brokers is not affiliated with and does not endorse or recommend any introducing brokers or financial advisors, including Hedgewise Inc. Interactive Brokers provides execution and clearing services to customers of Hedgewise Inc. For more information regarding Interactive Brokers, please visit www.interactivebrokers.com.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

Related Posts

September 2018: Amidst Volatile Markets, Hedgewise Leads the Pack Best-In-Class Risk Parity PerformanceCan You Time Risk-Managed Strategies? February 2018: Why Not to Panic When Markets Go CrazyHow to Link an Existing Interactive Brokers AccountHow to Link an Existing Interactive Brokers Account - New AMHow to Link an Existing Interactive Brokers Account - Classic AMAnalyzing Hedgewise 2017 Performance: Benchmarks, Timeframes, Theory and ProofQ3 Update: Hedgewise Outperforming Every Asset Class in 2017Understanding the Theory Behind Better ReturnsApril 2017: A Great Start to the Year2016 Year In Review: Hedgewise OutperformedHedgewise Systematically Avoids Bond CorrectionNovember Commentary: Election Risk Is Just Like Any Other Risk, And It Is Being ManagedHow to Open An AccountHow to Create Leverage Using Options ContractsHedgewise Outperforming Every Major Risk Parity Mutual Fund in 2016Risk Parity Just Got Even BetterWhat's Next for Risk Parity? 2016 Hedgewise Midyear Report: Choppy Markets, Big ReturnsThe Right Way To Invest In Oil Rising Interest Rates And Risk ParityThe Right Time to Buy Oil in 2016The Wrong Way To Invest In OilRisk Parity Outperforming the S&P 500 by 7% in 2016Risk Parity: Year-In-Review and 2016 OutlookWho We AreHow It Works: Faster, Cheaper, and More EfficientOur CustodianFeesWhy Commodities are the Smart Play for 2016Retirement Investing in a Rising Interest Rate EnvironmentComparing Hedgewise Risk Parity to the Competition Improvements to our Risk ModelSeptember 2015: Risk Parity Limits Losses, and the Upside of FearAugust 2015: Perspective on the Commodity CrashIs Gasoline the Smart Oil Play? (UGA vs. USO) 2015 Mid-Year Review: Understanding Unbalanced MarketsNavigating the Bond Market CorrectionFeeling Good About A Down MarketNew Account Set-Up - InvitationThe Optimal Gold Investment Strategy (Switching Between DGL and GLD)How Hedgewise Saved You Taxes in 2014This Is Why You Are Still Diversifying WrongThis Is Why You Are Diversifying WrongRisk Parity: What It Is, How It Works, and Why It MattersThe Financial Revolution Has Begun: 5 Bold Predictions for the Next DecadeMust Bond Investors Fear Rising Interest Rates? Insights From 1958 To 1982 The Oil Futures Curve Reversal: What You Need to Know5 Reasons Why You Should Be Afraid of a Bear Market, and How to Protect Your PortfolioHow to Invest in Oil for the Long Term, Avoiding Contango and Tracking ErrorTax Optimization and Tax HarvestingHedgewise FAQ