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Tuesday, February 5, 2013

JV Long/Short Equity Review

My latest review is for the strategy, JV Long/Short Equity, offered on Collective2.  JV Long/Short Equity has been around since 2009, and remains actively traded in 2013.

The strategy performed strongly in 2010 and 2011, but 2012 was a rough year and only a late recovery near the end of the year helped claw back losses. The strategy experienced a maximum peak-to-valley drawdown of 25%, which is a little above the 20% tolerance threshold I would like, but for the age of the system this is reasonable.  Note: the return chart for 2012 shows absolute return from Total Value of $432,647, not $100,000 as displayed in chart (this strategy would not have traded an account to ruin!).

The month-to-month returns give a better representation of the 2012 slump, which given its past out-performance isn't too bad. It was primarily hurt by the 9% loss in May 2012.

The risk profile of individual trades is good; 92% of the 549 trades executed fell under the 'Low Risk' rating, the remaining 8% were categorized as 'Normal Risk' - although there was one trade considered 'Extreme Risk' and one as 'Very Risky'. 

The strategy trades a mix of long and short positions, although it favors buying: 67% of trades are entered on the long side. 

If we take a look at some of the trades the strategy has executed, there appears to be clear logic applied with practiced risk management.  Examples:

The rough patch in 2012 included an Apple trade which didn't catch a recovery after what looked to be a solid entry.  The big gap in late April was triggered by positive earnings, but is often the case when a stock's price is declining, the gap closes. Gap closures are usually not a strong bullish sign, but as entry opportunities they offer relatively low risk;  the swing low at $550 would have been good protection with potential upside targets of $615 and $638. The strategy entered on what looked to have been a bounce after a successful gap test. Unfortunately, the bounce proved to be false and the stock undercut the April swing low, exiting the trade.  While a loss, this was a 'good' trade.  

The one trade which was categorized as 'Very Risky' and has the highest mid-trade drawdown (at -13.8%) was a Trina Solar Ltd trade executed in the early days of the strategy.  The core idea of the strategy appears to take advantage of significant pullbacks in stocks which have enjoyed long standing rallies (Trina Solar had rallied from the March 2009 low of $2.88 to the $31.18 high).  The entry here proved to be ideal, but perhaps "cold feet" after the big drawdown resulted in an early exit? The trade showed no loss. 

The most recent trade was a profitable short trade playing against the pump-and-dump psychology. Keryx Biopharmaeuticals exploded to life after months of nothing.  Its kidney disease drug, Zerenex, performed strongly in a late-stage clincial trial, and this sent the stock price on a wild ride higher.  Again, the logic for a short trade was available at relatively low risk. First, there is the 'inverted hammer', a bearish candlestick with a high suggesting $10 was going to play as resistance.  Second, the stock had rallied hard and fast, rejecting any reasonable valuation model which could have been applied; this move was pure greed. Third, on the day the trade entered, buyers had failed push the stock above $10. It also struggled to hold above its open price.  So the strategy had a nice entry price with an available stop above $10. Not surprisingly, the stock collapsed the next day and the strategy existed for an easy profit.

This is a strategy worthy of further attention.  I recommend downloading the csv file of available historic trades and sampling the logic used.

The strategy retails for $100 a month