Capitalmind Chase is a Nifty Futures trend-following strategy that aims to generate alpha over the market in the long run. There are two components of Chase – active and passive. For the active component, we take a long or short position in Nifty Futures, and for the passive component, we are long on a Nifty ETF..
YTD 2023, CM Chase is up 9.2% with lower volatility than the Nifty. In this post, we analyse how the strategy has performed over the last seven months (1 Jan – 31st July 2023) and since its inception.
Capitalmind Chase: 3-Year Milestone
17th July 2023 marks the completion of three years for Chase. Over this period, the strategy has achieved a 3Y CAGR return of 28.7% against Nifty TRI’s return of 22.7% generating an alpha of 6%. Below are the Chase returns over various time frames and equity curve since inception. (Note: Pre-Tax)
Capitalmind Chase Vs Nifty TRI Equity Curve Since Inception
The above returns appear good as the strategy has done well over various time frames. Point returns often present a positive outlook, but the true essence lies in assessing the one-year rolling returns. (To avoid starting or ending point bias)
The below chart represents the 1-year rolling returns for Chase and the Nifty TRI since we went live. The x-axis represents the date, and the y-axis represents the 1-year rolling return. The section shaded in light green represents the period when Chase Strategy has beaten Nifty TRI.
Three key points:
- Average 1-Year Rolling Return at 24.4%: and for the Nifty TRI, it’s around 18.0%. The average alpha over the index is 6.4% in any one-year period.
- Outperforming Days at 78%: This indicates the number of days where the 1-year rolling return of Chase was greater than the 1-year rolling return of the Nifty TRI. We found that Chase outperformed the Nifty TRI on 466 days out of 598 days. This means that 78% of the time Chase did better than the Nifty in any 1-year period
- Volatility lower than Nifty: This is a measure of the variability or dispersion of the 1-year returns. A higher volatility means more variation in the returns, which usually indicates more risk. For Chase, the volatility of the 1-year rolling returns was 14%, while for the Nifty TRI, it was slightly higher at 18%. Chase was less volatile than the Nifty TRI. Having said that, this is a levered strategy and will have a significantly higher impact during black swan/edge case / abrupt market events, so the past may not reflect the future.
Drawdown Since Inception: Chase Vs Nifty TRI
Every strategy, whether active or passive, goes through phases of underperformance. Exiting a strategy during such a phase means missing out on the major part of its subsequent outperformance.
However, it is very difficult to see through a strategy during drawdowns and keep faith in the investment process. This attitude of sticking to the process and backing your research is what makes the difference between good and great. A strategy is no good if you cannot execute it the way it should be.
Richard Dennis once emphasised the importance of consistency and discipline, stating,
“Even if trading rules were published in the newspaper, it is unlikely that anyone would follow them. The key lies in maintaining consistency and discipline.”
So, let’s look at things that gave us pain.
There are six different scenarios Chase goes through.
- In the above table, a green arrow in the Nifty futures and Nifty ETF columns indicates a long position on Nifty futures and ETF respectively.
- The yellow arrow in the Nifty futures column indicates a short position in Nifty futures.
- A green arrow in the Nifty index column suggests that the index has moved up, while a yellow arrow suggests that the index has moved down.
The drawdowns in Chase are caused by two of the six conditions listed above: situation 2 and situation 6.
Situation 6 is the worst-case scenario, in which we are long on both futures and ETFs and the index swings against us. This results in the worst drawdown for the chase strategy, which is illustrated by the red region in the chart below, in the year 2021.
Capitalmind Chase Journey so far in 2023
Unlike the previous two years where Chase started with a long trend, this year Chase had a rocky beginning. The streak continued till mid Feb when it finally managed to capture two significant downward trends. However, as we have seen repeatedly, these trends were subsequently followed by whipsaws.
March and April proved to be favourable months as the market began to rise, and Chase was able to capitalise on this upward trend.
However, May and June brought about a period of chaos. The market remained stagnant without a clear trend, leading to high volatility. There were 14 trades that resulted in losses, with an average holding period of just 2 days. Fortunately, these losses were relatively small and were counterbalanced by a lengthy upward trend towards the end of June.
Below is the monthly performance of the Chase strategy for 2023
Those who had experienced the turbulent market conditions of 2021 found it considerably easier to navigate through this phase. The graph below illustrates the drawdown curve for the first half of 2023.
The year 2023 is unique for Chase as it was for the first instance where 100% of their returns were generated during the market hours. Below is the comparison between overnight vs market hours points.
Overnight Vs Market Hours Points
Capitalmind Chase: Futures trade statistics
How to read the above table?
- Total Points (6246): This is the total number of points earned. It’s a sum of all the points gained from successful trades and lost from unsuccessful trades. The product of total points, lot size, and number of lots will give the gains in rupee terms.
- Total Trades (241): This is the total number of trades executed. It includes both winning and losing trades. With total trades, one can ascertain the transaction cost for trading the active component of Chase.
- Winning Trades (79): This is the total number of trades that resulted in a gain since inception.
- Losing Trades (162): This is the total number of trades that resulted in a loss since inception.
- Profit Factor (1.4): Profit factor is a financial metric that is used to assess the profitability of a trading strategy. It represents the relationship between the gross profit generated by the system and the gross loss incurred. A profit factor of 1.4 signifies that, on average, the strategy has generated 40% more gross profit than gross loss. In other words, for every rupee lost, the strategy generated 1.40 in profit.
- % Wins (33% ): This is the percentage of total trades that were winning trades since inception.
- % Losses (67%): This is the percentage of total trades that were losing trades since inception.
- Average Win (277): This is the average amount of points gained from winning trades since inception.
- Average Loss (97): This is the average amount of points lost from losing trades since inception.
- Expectancy (26): This is a measure of the expected return per trade since inception. It’s calculated as the average win multiplied by the percentage of wins, minus the average loss multiplied by the percentage of losses. An expectancy of 26 signifies that, on average, for every unit of risk taken (per trade), the strategy is expected to generate a profit of 26 units.
- Max Win (1187): This is the maximum number of points gained in a single trade since inception. This was in the year 2022.
- Max Loss (-413.): This is the maximum number of points lost in a single trade since inception. This was in the year 2021.
- Max Drawdown (-2688): This is the largest drop from a peak to a trough. It’s a measure of the largest loss that an account has taken during a specific period. Chase had a maximum drawdown of 2688 points which was in 2021.
Key insights from the past 3 years
- The data shows that the win rate for Chase is 33%, which is indeed lower than a typical benchmark of 50% for random outcomes. However, a low win rate is not necessarily a bad thing in this type of strategy as long as it is compensated by high odds, i.e. reward-to-risk ratio.
- The average win is 277 points, while the average loss is 97 points. This means that the average winning trade earns about 2.9 times the average losing trade. This is a high reward-to-risk ratio and is a key feature of this strategy. As long as the wins are significantly larger than the losses, the strategy can be profitable overall, even if the number of winning trades is less than the losing trades.
- However, this strategy requires patience, as there can be long periods of small losses, and discipline to not close out winning trades too early, letting them run to achieve the maximum possible profit.
- Moreover, this strategy can be psychologically challenging to follow, because it requires enduring a high number of small losses and it can be tempting to close out a winning trade early to secure profits. Therefore, it’s crucial to stick to the strategy rules and not let emotions drive trading decisions.
In summary, Chase is a low win rate, high reward-to-risk strategy and it’s profitable over the long term, but it requires patience, discipline, and sound risk management.
Risk warning and disclosure
There are special risks associated with an investment in futures including market price fluctuation, leverage risk, liquidity risk, economic changes, and the impact of adverse, political, geological, or financial factors. No investment/trading strategy can guarantee performance results. Past performance is no guarantee of future results. All investments are subject to a multitude of risks, including loss of principal invested. Income taxes are not included in any of the above assessments.
1 The system follows a conditional leverage approach, the position is levered 2x on the upside and is not levered on the downside.
For further questions about the Capitalmind Chase, write to us at premium [at] capitalmind [dot] in or on twitter @capitalmind_in
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