Vivek Gadodia Co-Founder, Dravyaniti Consulting LLP

All strategies, models and data shown are for educational purpose only and do not constitute any advice to buy or sell any particular stock. Whereever references to any stock(s) or any particular techniques of investing or constructing portfolios are made, they are for educational purposes only.

The participants may decide at their sole discretion to choose to follow such advice, by fully understanding all the risks involved. Trading and investing in the markets is risky, and markets are constantly undergoing change, so what has worked in the past may not work exactly the same way in the future.

All images used throughout the presentation are licensed images, free to use for commercial purposes as well, through Google Images

Vivek Gadodia has 10 years experience in Algo Trading System Designing across Indian and International markets, and has co-founded 2 startups.

He has been using mechanical trend following systems since 2012 covering multi-asset and multi-market strategies

Earlier, Vivek worked with MF Global India and set up the Algorithmic Trading desk for their Institutional business, and he has worked with HSBC Bank and CMC India where he worked on techno-functional roles in Banking, Treasury and HRIS. A key project he worked on was for India’s Central Bank, RBI.

In 2017, Vivek led the design of a US Equities long/short market neutral portfolio strategy, which was ranked 2nd out of 672 entries in a contest by one of the World’s largest Crowd-Sourced Hedge funds. After rigorous due diligence over 50 parameters, the Algo was selected to be live traded for the fund (algos received allocation ranging from USD 100K to USD 3M)

He is a regular speaker on Algo Trading, Systems Trading and Technical Analysis related topics at events in India such as Finbridge Expo, Definedge Conference on Market Analysis (forthcoming). He has been a guest lecturer at management institutes and BSE Training Institute

Index – Boon or Bane

It is neither

People demonstrate herding behavior – during Boom and Busts

NIFTY Monthly Chart : Mar ‘04 – Oct ‘-08

The more velocity that is amassed on the upside, the higher will be the velocity on the downside, which comes eventually. History has shown this repeatedly, and it is a universal, timeless, truth in financial markets.

“The beginning of a revolution is in reality the end of a belief.” –Gustav Le Bon

Source: Investing.com

Challenge of single strategy – “One-strategy-fits-all” works well- till it stops working

E.g. 15-Minute time frame Swing-trading mechanical currency systems worked in Indian markets from 2009 until 2013. Then performance deteriorated.

USD-INR Monthly Chart : Apr ‘11 - Feb ‘18

After a stupendous rally during 2011-2013, the pair has gone sideways in 2014-2017 and there is significantly reduced volatility

Known Unknowns Unknown Unknowns

What is needed is a “One Size Fits All” Portfolio frame-work, subject to customization

Source: Investing.com

Brighter Red- Less Correlated

Brighter Green- More Correlated

Returns on CEAT, MARUTI, AUROPHARMA, JUBLFOOD and JETAIRWAYS are least correlated to returns on other stocks

The Heat-Map is correlation matrix of returns of a single strategy on multiple High-Beta, Momentum stocks

Source (Book): Principles- Life & Work by Ray Dalio, Chairman & Chief Investment Officer at Bridgewater Associates, L.P.

Diversification, for the sake of it, is inefficient

Between 10 to 20 non-correlated strategies, may be chosen for the portfolio

Such Diversification, done quantitatively, is very efficient

Portfolio Reward-Risk v/s No of Assets

40% of The Fort’s space was covered by water; a reservoir big enough to hold 1 billion litres of water. With rainfall, this was enough to hold an army of 50,000 without thirst for 4 years

Various types of price behaviour captured across strategies - Trend Following, Mean Reversion, Arbitrage

CAGR, Drawdowns, Recovery, Sharpe Ratio, Beta, Consistency of Returns

Size of Allocation across each strategy is the challenging part

Source (Web): Chittorgarh Fort http://www.popularmechanics.com/military/g2441/the-worlds-20-most-impressive-fortresses/

Chittorgarh : Among The World’s 20 Most Impressive Forts

Risk is the possibility of loss - That is, if we own some stock, and there is a possibility of a price decline, we are at risk. The stock is not the risk, nor is the loss the risk. The possibility of loss is the risk

In a diversified portfolio, multiple strategies come together to form the overall fund.

The most under-acknowledged dimensions of fund management is the ”UNCLE POINT” in finance.

A mismatch in the understanding of the Uncle Point can lead to the fund being stopped.

Source (Web): http://seykota.com/tribe/risk/index.htm

The Indian National Cricket Team

Cricketing Dimension

Strategy Dimension

Batting Style Winning Ratio

Bowling Style Trading Frequency

Pitch Conditions Market Environment

No. of Continuous Matches Lost

No. of Continuous losing trades

Source (Web): Wikipedia https://en.wikipedia.org/wiki/India_national_cricket_team

Profitability Correlation Matrix of Berkshire Hathaway Business Segments- from years 2008 to 2016

Insurance - Underwriting

Insurance - Investment Income Railroad

Utilities and Energy

Manufacturing, Service and Retailing

Finance and Rinancial Products

Investment and Derivative Gains/Losses Other

Insurance - Underwriting 1.00 -0.06 0.37 0.38 0.27 0.22 0.15 0.23

Insurance - Investment Income -0.06 1.00 -0.26 -0.36 -0.59 -0.27 -0.05 0.35

Railroad 0.37 -0.26 1.00 0.73 0.79 0.73 0.69 0.35

Utilities and Energy 0.38 -0.36 0.73 1.00 0.80 0.91 0.54 0.50

Manufacturing, Service and Retailing 0.27 -0.59 0.79 0.80 1.00 0.85 0.77 -0.01

Finance and Financial Products 0.22 -0.27 0.73 0.91 0.85 1.00 0.76 0.46

Investment and Derivative Gains/Losses 0.15 -0.05 0.69 0.54 0.77 0.76 1.00 0.08

Other 0.23 0.35 0.35 0.50 -0.01 0.46 0.08 1.00

Average Correlation 0.32 -0.03 0.55 0.56 0.49 0.58 0.49 0.37

31% of the profits in these 9 years have come from Insurance – Investment Income . This is also the most Profitable Segment i.e. and it is the least Correlated to all the other businesses. Berkshire made a

profit even in 2008.

Source: Dravyaniti Research

Portfolio of Non-Correlated Strategy Returns v/s NIFTY – Benchmark Index

MTF- High Beta, Momentum + Break-out Cons_NBN – Regression-based Indian Indices Cons_LS – All Beta, Momentum + Mean-Reversion ISO – Intraday Equities Short Only Cons_LO – Long Only, Equities DNC_PORT – Combined 5 Strategy Portfolio

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NIFTY

Source: Dravyaniti Research

FROM TROUGH TO DEPTH LENGTH TO TROUGH RECOVERY

Max Drawdown 26-May-

2014 05-Mar-

2015 07-Sep-

2015 29.42% 317 190 127

Rupees 1 Million Invested turns into Rupees 4.8 Million, in 4.75 Years during the back-test period

This is a simple Annualised

Return of ~80% Per Annum with Max. Drawdown

of ~29% Per Annum @ 5X

leverage The Portfolio Reward / Risk Ratio is 2.75

By deploying Non-Correlated

systems, the fund can make higher profits with the same

level of risk

We then reduce leverage to half and

the fund aims for ~40% Avg. Annual

Returns, with a Max. ~14.5% downside

This gives us a huge buffer, in

the event correlations break down or change in

future.

Source: Dravyaniti Research

Individual Strategy Correlation to NIFTY Benchmark

Good mix of strategies – some strategies do well when Benchmark does well (+ve correlation) and some do well when Benchmark does not do well (-ve correlation).

Overall Porftolio (DNC_PORT) Beta is between -0.3 and +0.3, which means that overall, the Portfolio is non-correlated with the Benchmark. That is what we are looking for in an Absolute Return Portfolio. This is where an Absolute Return fund can add value.

MTF CONS_LS CONS_LO CONS_NBN ISO DNC_PORT

Correlation -0.19 0.22 0.57 0.08 -0.42 -0.11

Correlation p-value 0.0000 0.0000 0.0000 0.0061 0.0000 0.0001

Beta -0.39 0.18 0.17 0.03 -0.27 -0.28

Source: Dravyaniti Research

https://www.linkedin.com/in/vivekgadodia/ @technovestor +91 9870104332

vivek@dravyaniti.com

Find out about our offerings and services at : www.dravyaniti.com Feel free to call or email us and we’ll be glad to discuss if you are looking to protect your portfolio or make your ideas “rule-driven”