Friday, April 24, 2015

The Case for Hussman Strategic Growth

Well... maybe not the "case for". Rather, a "kinda / sorta case". If you're contemplating making a long-term allocation to the fund (you're not)... don't.

While John Hussman is without question a remarkable writer (and in my view a remarkable analyst - just too smart for his own good when it comes to allocating capital), the Hussman Strategic Growth Fund has produced some pretty horrific performance.

Highlights:
  • Performance percentile ranks of 97th, 100th, 100th, and 100th over 1, 3, 5, and 10 years
  • Negative absolute performance over 3 months, 1 year, 3 years, 5 years, and 10 years
  • A current drawdown of 36% since the 9/15/08 Lehman Brothers collapse 

Worse... the first page of the prospectus outlines:
The Fund seeks to achieve long-term capital appreciation, with added emphasis on the protection of capital during unfavorable market conditions.

While I won't remotely defend that performance, especially given its objective, I will point to its history of outperforming during the two market downturns since the fund's inception. This provides a potential opportunity for an investor willing to look past recent performance.


Potential ways to utilize the fund...

Absolute Momentum
Applying a very simple momentum model as introduced in Meb Faber's A Quantitative Approach to Tactical Asset Allocation (follow Meb on his blog mebfaber.com) would have provided an investor with the majority of excess performance, without the subsequent 6 1/2 year downturn. In this case we are simply allocating to the Hussman Strategic Growth Fund when the fund is > 9-month moving average, otherwise allocating to cash.


Dual Momentum
Rather than sit in cash if there are better opportunities, another way to utilize the Hussman Strategic Growth Fund is through a dual momentum approach as introduced in Gary Antonacci's white paper Risk Premia Harvesting Through Dual Momentum (follow Gary at optimalmomentum.com). In this instance, I tweaked his formula slightly and allocated to Hussman Strategic Growth, the S&P 500, or cash based on whichever is the most above it's 9-month moving average.


The results...


So, if/when markets eventually roll over and you think Hussman is capable of outperforming in a bear market environment (he certainly has spent much of the last 15 years contemplating how to structure a bearish portfolio), the strategy might actually make for an interesting allocation.

4 comments:

  1. Great example of the power of dual momentum!

    JL

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  2. Hey - I'm happy to see econompic revived but rather than go all fawning on that, I have to be a smart-ass :-). Years of reading dshort creates instant reactions when I see graphs like these, specifically, shouldn't it be in real total returns, and shouldn't it also be on a log scale? Then just to be a complete smart-ass, population adjust it and finish off by mockingly comparing a version where shadowstats is subbed in for CPI for inflation adjustment. Okay, maybe not the last two. Cheers!

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  3. Haha... thought about putting it in log scale, but Hussman stand alone / momentum returns (the first two charts) looked off as the returns were never strong enough to require it. As for nominal / real, that's fine but requires another step of pulling in inflation for something I don't view as necessary (especially in this regime). I'll leave the incorporation of ShadowStats data for Zerohedge. Thanks for the feedback.

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  4. I track Hussman's equity exposure weekly, and use that series to estimate timing gain/loss. Originally the HSGFX was one of my best "Prime Timers," but over past ten years the fund has given up an average 1.2% a year in timing changes(exposure variation).

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