How We Structure Equity Trades and Measure Performance

Introduction

This note summarises our methodology for making trade recommendations and measuring performance.

Our goal is to present trade concepts that investors can implement in the context of their portfolio. We implement trades as long/short combinations, and we assume each trade is equally weighted.

Many investors may not take short positions, or may set larger or smaller trade sizes relative to the trade’s weighting in an index. Our long/short positions can instead be implemented by overweighting one leg and underweighting the other, and trades can be sized according to an investor’s portfolio requirements.

At this time we measure performance based on price changes rather than total returns or price changes plus dividends. We generally do not expect trades to be in place long enough for dividends to be material.

Our trades may be fundamental or tactical. Fundamental trades tend to be longer term and reflect expectations about the economy or sector or a belief that something is over/undervalued. Tactical trades seek to take advantage of shorter term dislocations.

Long/Short Positioning

We present trades as long one leg and short the other. Both legs are equally weighted. Our expectation is that the long leg outperforms the short leg.

For index and S&P 500 sector trades we do not have a marketweight category. A marketweight position is an implicit long position. The expectation is that a long position in an index or sector will perform in line with or better than the short leg.

Performance Measurement

We measure trade performance on the basis of price changes since inception. The since inception performance is the change in the long leg price divided by the change in the short leg price:

Where:

We measure performance across trades as the average return:

Where:

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)