Industry Specific Hedging
Golden Toque CapitalCarrington Bradley
Patrick KanePete RudnickDennis Wu
February 26, 2004
Agenda
Introduction Industry and Factor Selection Screen Results Portfolio Performance Out of Sample Testing Optimization Parting Thoughts
Introduction
Industry Specific Comparison Are there certain industries that
over/under perform based vs. the market? Cam’s Merrill Lynch work
Starting point for variables Interest in using FactSet
Cool and powerful tool Get to use a $250,000 laptop
Industry Selection
Based on SIC Codes Two digit codes in FactSet Minimum of 100 companies listed
Banking, Energy, Food, Electronics, and Telecom
Compare to US Common Stock returns for same time periods
1990 to 2000 in-sample time period
Factor Selection
Based on Quant Stock Selection Class Expectational
Consensus forecast earnings estimate revision ratio Change in consensus FY estimates
Momentum 1 month Price change 3 month Price change
Fundamental Dividend Yield Rate of Reinvestment
Energy Screen Results
Energy Sector Screened By 1 Month Momentum
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
-1- -2- -3- -4- -5-
Annu
al V
alue
Wei
ghte
d R
etur
ns
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
Energy Screen Results
Energy Sector Screened By Reinvestment
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1 2 3 4 5
Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
Banking Screen Results
Banking sector Screened By 1 Month Momentum
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1 2 3 4 5
Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
Banking Screen Results
Banking Sector Screened By 3 Month Momentum
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1 2 3 4 5
Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
Banking Bivariate Result
-1--2-
-3--4-
-5-
-1-
-2-
-3-
-4-
-5-
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Valu
e W
eigh
ted
Retu
rn
One Month Price Momentum
Three Month Price Momentum
Out of Sample Results
Out of Sample Energy Sector Screened by Reinvestment
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
1 2 3 4 5
Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
ard
Devi
atio
n
Energy Sector 2001-2002Out of Sample Energy Sector Screened by 1 Month Momentum
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-1- -2- -3- -4- -5-
Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
1 month momentum Reinvestment
Out of Sample Banking Sector Screened by 3 Month Momentum
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-1- -2- -3- -4- -5-Annu
al V
alue
Wei
ghte
d Re
turn
s
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
Banking Sector 2001-2002
Out of Sample Results
Out of Sample Banking Sector Screened by 1 Month Momentum
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-1- -2- -3- -4- -5-
Anua
l Val
ue W
eigh
ted
Retu
rns
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Stan
dard
Dev
iatio
n
1 month momentum 3 month momentum
Factor Optimization
Code Weights E σSIC_13_F1_B1 - 0.1725 0.0032 0.0925SIC_13_F1_B5 0.3738 0.0226 0.1125SIC_13_F4_B1 0.8408 0.0177 0.0952SIC_13_F4_B5 - 0.0421 - 0.0008 0.1105
Portfolio 1.0000 0.0228 0.1000
Energy Sector with optimized weights
Double S&P Risk 27.3% Return
Factor Optimization Banking Sector with optimized weights
33% more risk than S&P 31.2% Return
Code Weights E σSIC_60_F1_B1 - 0.0923 0.0037 0.0580SIC_60_F1_B5 0.9038 0.0293 0.0627SIC_60_F2_B1 0.2438 0.0053 0.0572SIC_60_F2_B5 - 0.0554 0.0253 0.0726
Portfolio 1.0000 0.0260 0.0600
Parting Thoughts None of our 8 screening factors were
effective screens for total US stocks Screening by return and going long
yields average monthly return: Energy -0.26, Banking 0.16
Solver optimized weights had correct sign
Made lots of money, but did not consider trading costs
Additional Slides
Factors Code 1: 1 month price change
G_PRICE_1MCHG Code 2: 3 month price change
G_PRICE_3MCHG Code 3: Div yield
G_DIV_YLD(NR 0 L45D) Code 4: Rate of reinvestment
G_REINV_RATE(NR 0 L45D) Code 5: Consensus forecast earnings est. revision ratio
(IH_UP_FY1R(0)- IH_DOWN_FY1R(0))/IC_NEST_FY1R(0) Code 6: Change in consensus FY estimates
IH_MEAN_FY1R_3MCHG Code 7: Operating Cash Flow/Sales
G_CASH_FLOW/G_SALES Code 8: Interest Coverage
G_INT_COV
SIC 13 Summary Energy
Factor 1 1 2 3 4 5 Long/Short BenchmarkFractile returns 1.84% 8.50% 10.37% 19.93% 31.34% -29.51% 16.30%Std Dev 31.97% 28.83% 31.34% 31.27% 37.41% 24.07% 13.68%Avg Relative Performance 3.00 2.50 2.75 2.00 1.63
Factor 2 1 2 3 4 5 Long/Short BenchmarkFractile returns 3.32% 7.74% 14.82% 17.58% 21.98% -18.67% 16.30%Std Dev 35.53% 31.90% 29.12% 33.55% 37.27% 26.45% 13.68%Avg Relative Performance 3.06 2.56 2.19 2.25 1.81
Factor 3 1 2 3 4 5 Long/Short BenchmarkFractile returns 12.86% 15.60% 18.35% 33.33% 11.44% 1.42% 16.30%Std Dev 25.51% 33.32% 38.75% 63.94% 35.72% 16.11% 13.68%Avg Relative Performance 2.38 2.44 2.19 2.44 2.44
Factor 4 1 2 3 4 5 Long/Short BenchmarkFractile returns 22.03% 18.76% 13.23% 4.92% 1.82% 20.21% 16.30%Std Dev 34.81% 28.46% 26.94% 30.86% 37.79% 26.52% 13.68%Avg Relative Performance 1.63 2.06 2.31 2.94 2.94
SIC 60 Summary Banks
Factor 1 1 2 3 4 5 Long/Short BenchmarkFractile returns 5.09% 21.22% 19.55% 29.70% 39.03% -33.94% 16.30%Std Dev 20.40% 20.27% 21.42% 23.68% 22.48% 12.97% 13.68%Avg Relative Performance 3.63 2.56 2.63 1.94 1.13
Factor 2 1 2 3 4 5 Long/Short BenchmarkFractile returns 6.55% 18.08% 19.50% 21.38% 35.98% -29.42% 16.30%Std Dev 21.17% 19.60% 20.59% 22.73% 26.07% 17.29% 13.68%Avg Relative Performance 3.38 2.44 2.44 2.25 1.38
Factor 3 1 2 3 4 5 Long/Short BenchmarkFractile returns 32.95% 22.54% 16.49% 13.45% 17.90% 15.05% 16.30%Std Dev 23.20% 23.69% 22.44% 20.91% 23.22% 13.28% 13.68%Avg Relative Performance 1.25 2.13 2.69 3.06 2.75
Factor 4 1 2 3 4 5 Long/Short BenchmarkFractile returns 22.95% 18.25% 19.15% 15.67% 19.16% 3.79% 16.30%Std Dev 23.28% 22.03% 21.24% 21.09% 23.23% 15.01% 13.68%Avg Relative Performance 1.94 2.69 2.31 2.81 2.13