Carlos Chujoy from the Employment Retirement System of Texas, Aashish Vyas from Swan Global Investments, and Joanne Hill from CBOE Vest Financial teamed up this afternoon for a session titled “The Decision Cycle for Downside Risk and Income-Focused Strategies”. 

Aashish kicked things off with his part titled “Traders, Fishermen, and Big Data” which was a great analogy of fishing with being a trader.  After showing how fishing for a living and trading are similar Aashish discusses back testing and the various pitfalls associated with back testing.  He showed several relationships that have no logic but do have statistical correlations.  A couple of his examples were a correlation between the Divorce Rate in Maine and Per Capital Consumption of Margarine or US Spending on Science, Space, and Technology and Suicides by Hanging, Strangulation, and Suffocation.  Applying the same thinking to the S&P 500 he noted that over 2/3rd of the time the S&P 500 is either down for the year or up more than 20%, despite the average return being 10% a year since 1926. 

Carlos Chujoy followed Aashish to talk about the Decision Cycle for Downside Risk and Income Focused Strategies.  His discussion addresses a common problem about diversification, that when you need it the most it tends not to work.  He shows the drawdown of a 60/40 portfolio is much less than just owning stocks in the form of the S&P 500, but the performance of 60/40 is similar to just owning stocks.  The next step was to test different option based strategies as diversifier and performance enhancers to a 60/40 portfolio.  What resulted was the ability to enhance performance by using certain option strategies in different market regimes as defined by the four stages of the business cycle. 

Joanne Hill from CBOE Vest presented by focusing on newer approaches to investing.  She notes that we tend to use short term data when analyzing returns therefore we have been relying on management skill for discretionary portfolio management.  CBOE Vest has been focused on target return profiles with payoffs defined in terms of buffers, caps, or multiples of an underlying index’s returns.   The target result can be geared to objectives that may reduce downside risk or enhance certain returns.  Joanne finished her presentation with showing the structure of the CBOE S&P 500 Range Bound Premium Income Index (SPRI)