Suppressing volatility without compromising returns
Obsidian’s proprietary machine learning technology systematically allocates capital between assets within a portfolio. This facilitates a unique volatility suppression methodology which in turn improves returns leading to much better Sharpe and Sortino Ratios respectively.
The graph below shows the rolling 1 month realised volatility for the SPY and Obsidian SPX Sector Portfolio along with the SPY (dotted line).
As the SPY fell in March 2020 and its realised volatility spiked the Obsidian SPX Sector portfolio neither fell as far nor as fast.
On average it only experienced around 55% of the SPY’s volatility over the sample period.
On the days that the SPY rose, Obsidian underperformed by on average 40bps and when the SPY fell it outperformed by an average of 80bps.
This resulted in (see graph below) a higher CAGR: 31% vs 16.2%, lower volatility: 9.7% vs. 21.3% and therefore a better Sharpe: 2.8 vs. 0.8 and Sortino: 4.9 vs 0.9 Ratios.
Obsidian was never more than -6% from a High Water Mark (HWM) and was less than -5% for only 0.2% of the sample period. This compares to the SPY which was at worst -34.1% from a HWM and spent 27.3% of the period below -5%.
All figures and graphs are for unleveraged positions, gross of fees and profit share, with no shorting.
Obsidian is able to achieve this risk return profile as the objective hedging regime means that capital is reallocated dynamically and proactively.
When set up to be more defensive, the portfolios use cash more aggressively, whilst still remaining invested in the strongest performers. The graph below shows the rolling 1 month cash holding (%):
The local peaks in the cash position coincide with drops in the market. As it recovers the holding falls to allow more to be invested in the chosen stocks.
The option to reinvest some of un-allocated cash on a rolling basis means that capital can be used more efficiently and the portfolio’s returns are enhanced.
Volatility suppression can be just as easily applied to other portfolios, including those which are Shariah Compliant.