How Obsidian has performed during the COVID-19 selloff.
The COVID-19 crisis is unique in both its scale and human cost. The numbers dying are horrific and still growing, with no clear end in sight. At Obsidian we wish everyone safe passage through these testing times as the preservation of life is of paramount importance.
Recently we have been asked by several clients to summarise how our technology has coped with the extreme moves that the market has experienced recently:
COVID-19 has changed so much with regards to investments, the extended bull market is most definitely over, and market volatility will keep spiking sporadically as we see large moves become the norm, at least for the foreseeable future. Many of the previous assumptions are irrelevant leading Central Banks no choice but to launch massive support packages, with no guarantee of success. In this climate many investors have resorted to cash and want to wait until the markets reach a floor and/or the virus begins to subside. However, timing will be even harder than normal. The alternative is to adopt a systematic, objective methodology that has coped well during the recent turmoil yet has not missed out of the previous rally.
One of our benchmark portfolios is the Obsidian-NDX, it is made from a universe of the largest Nasdaq-100 stocks and Index ETfs (un-leveraged, leveraged and inverse). The graph shows un-leveraged returns.
Over the last three years it has returned a CAGR of almost 30% and outperformed the market (QQQ) in every metric:
More recently, the year-to-date performance illustrates that Obsidian’s technology not just coped with the sharp selloffs but traded successfully through it:
Whilst the first confirmed COVID-19 case occurred in mid-January in the US, the market did not react for another month or so. During this period Obsidian tracked the QQQ, though slightly under-performing it. During the selloff Obsidian gained 0.2% whilst the market lost more than 30%. Obsidian did not miss out on the subsequent 10% relief rally between the 23rd to 26th March.
The following graph shows the structure of the Obsidian-NDX Portfolio over the YTD and it will help explain how the Portfolio was able to outperform the market, normally this is proprietary information but under the circumstances we felt it was both useful and important to share this:
It is helpful to split the period into three phases:
31st December to 21st February:
The Portfolio started off with a predominantly long market position with little cash or inverse positions.
The Portfolio Management System gradually decreased the long positions and increased both the holdings of inverse ETFs and outright cash. By this point the QQQ was +8.3% on the year and the Obsidian-NDX was +5%.
21st February to 23rd March:
The increased inverse ETF position and rapid switch from a long position to a significant cash holding defended the Obsidian-NDX from the sharp selloff. The QQQ was -28.1% whilst the Obsidian-NDX was +0.5%.
23rd March to 31st March:
Following the announcement of a stimulus package the QQQ rallied 9.3%. The Obsidian-NDX rallied 7.3% as the cash position was reduced to increase the long market holdings. At the end of the month the inverse ETF position had been increased as it looked like the market was about to turn again.
The example above demonstrates that Obsidian’s Portfolio Management system is capable of trading through very difficult conditions using systematic and dynamic re-balancing. Further, as the long-term performance illustrates, it achieves this without compromising too much, if anything, during easier to trade bull phases.