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Capitalmind Chase: The Tenacious Warrior


Don’t predict. React. A motto that’s difficult to follow because we like to lead. Following the trend has been a reliable way to sustain returns in markets: there is a prize for second place, and it’s sometimes more significant than first place. Chase, our long-short strategy at Capitalmind, gets behind the trend and quietly makes its presence felt when nothing else seems worthwhile. This is one of those times.

This year the Nifty has been highly volatile due to the Russia-Ukraine war, Central Banks raising rates to combat inflation, and a lockdown in the major cities of China. However, Capitalmind Chase, our long-short trend following strategy, gave an alpha of 10.5% in this highly volatile bearish market.

Capitalmind Chase is a Nifty Futures trend following strategy that aims to outperform the market in the long run. Chase is a low leverage strategy, so there are two components – active and passive. For the active component, we take the long/short position in Nifty Futures, and for the passive component, we go long on a Nifty ETF. 

We publish signals for the active component (Nifty Futures) on our Slack community. To reduce the execution slippage, we give signals based on futures prices, not spots.

In this post, we analyse in detail how the strategy has performed over the last six months and also get an overview of the system since its inception (~2 years ago). We are also publishing trade-wise statistics for the active component (Nifty futures) since inception. 

Outperforming the index amidst volatility

The below chart represents the Chase vs Nifty NAV for the first half of 2022. The green shaded region represents when we made points in futures by going long on Nifty futures, and the red area represents when we made points in futures by going short on Nifty futures. 

There are three essential things to note from this chart – 

  1. When Nifty is moving upwards, Chase is moving up by a little more. This is because we are long on both the active and passive components. Ideally, it should increase by a factor of 2, but it’s a little less. (Indicated by green region)
  2. When Nifty falls, Chase does not fall. It flats out. This is how the hedge plays its part and protects drawdowns. (Indicated in red region)
  3. The end of the green area (long futures trade) is not at the peak, but it’s slightly after the peak when the market starts reversing. This represents the key feature of a trend-following strategy: you will never be able to exit at the peak but only when the trend reverses. So you should have the stomach to let go away some part of your profit.

Why is having a low drawdown important?

Suppose you want to trade one lot of futures, then you require approximately ₹ 1,00,000  (as of 15th July 2022). This is roughly 8x to 10x leverage on the Nifty. Now, if you have some bad luck and the first few trades are during this drawdown, then you would lose a significant amount of your capital. The average drawdown for NIFTY 50 over the past years from 2000 has been -31%. So if you fall by 31%, to get back to 1 lac, you would need to generate a 44% return. That’s 13% more return to get back to your original position. 

But, what if a strategy is designed to protect against such drawdowns while capturing most of the upside. That’s where Chase fits in. 

If you look at the red region in the above chart, the Chase NAV is almost flat whenever the Nifty falls. This is because we are short on futures (active component) which are earning money, but at the same time, we are long on ETF (passive component), which is losing money. Hence, Chase NAV is flat and not falling as much as Nifty. Don’t we love it when the design plays out as planned? 

Chase is a max 2X levered strategy where we get a 2X return on the upside and are hedged on the downside.

The drawdown chart for 2022 shows how we could limit the downside with Chase.

Chase has mostly had a lesser drawdown than Nifty. There was only one instance from 6th April to 4th May where Chase had slightly more drawdown than Nifty (represented by the red region in the below chart). However, it managed to limit the downfall during all the big falls during the first half of 2022.

Though the market was highly volatile, Chase earned a 1.4% return vs a Nifty return of -9.1% – an alpha of 10.5% over the index. We have been running the strategy for a little under two years, and performance over this period is as below. 

Each month plays out differently.

Interestingly, even though Futures scored more points in January than March, Chase gained more in March than January. This is because, in March, Chase is hedged on the downside and earns a 2x return on the upside, enabling the strategy to perform better in the Long trade than the Short trade.  

The last six months have been no less than exciting for the markets. We saw a war in Europe, Inflation in the US, global supply issues, ever-increasing crude prices, and interest rate hikes in India and abroad. The below chart captures all these events in numbers.

Capitalmind Chase NAV since inception

Chase completes two years this July. These two years saw a classic bull market, some horrifying whipsaws, and finally, recently, the downturn. However, Chase outperformed the Nifty throughout these years and gave an annualised return of 38.7% against the Nifty annualised return of 20.8%.

The most significant disadvantage of a trend-following strategy is it’s prone to sudden reversals and whipsaws. It also has a lower win rate. So when these two factors combine, it leads to a nightmare for any trend followers. This is what we saw in 2021. Chase had more drawdown than Nifty due to the choppy market (represented by the red region below). However, Chase managed to recover quickly from this fall.

Soon after that, the Nifty started falling, and Chase managed to capture this falling trend. During this period, Chase had lower drawdowns than Nifty, represented by the last green region. Similarly, the leftmost green area represents the time when there was an uptrend and chase had a lower drawdown than Nifty.

So when there is a trending market, Chase can capture the trend and have a lower drawdown, but when it’s range bound, it has a higher drawdown than Nifty.

Futures statistics since Inception

Although looking at the active component (futures) alone means nothing because performance will only come over time. In the short term, you will either be exuberant or miserable. Yet, to get an idea about the big picture of the active component (futures) trades, we look at the summary for each calendar year.

Few takeaways from the above table

The number of winning trades is less than the number of losing trades. So the success ratio is less than 1. A success ratio is the number of profitable and unprofitable trades over a specified period. It’s a commonly used trading metric to evaluate the strategy. Because of this, you will feel miserable most of the time, and it’s a behaviour you must live with. 

Chase is a low win rate strategy with a win rate of 32.52% since its inception. You win only one of three trades. But your expectancy per trade is positive because of a high profit on a win.

Hence, Chase is a positive expectancy strategy with a low win rate and a high reward-to-risk trading system. So, there will be a lot of whipsaws when the market is rangebound, but once it catches a trend, all your losses will be eliminated by large profits. As Ed Seykota says, “One good trend pays for them all”.

Further Reading:

Introduction to Capitalmind Chase

Check out Capitalmind Model Portfolios

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