Outperforming in a highly volatile Bear market
2022 was difficult for Indian investors. Especially for those who started their investing journey recently during the market boom, who saw 2022 with events like rising Omicron cases, the Russia- Ukraine war, rising inflation, rate hikes, and FIIs pulling out money.
The Nifty hit 52 week lows many times in the year. Capitalmind’s trend-following strategy, Chase captured these trends and managed to be reasonably hedged on the downside. We show that in circles in the below chart. Nifty was falling dramatically, but Chase returns were flat during this period.
Quick note: Chase uses moving averages to be 2x long or net flat on the market, using a combination of a Nifty ETF and a Nifty futures contract.
2022 was not that bad for Indian markets. Compared to global indices, the Nifty 50 was among the best-performing markets this year. It fell less than major global indices and was the quickest to recover to a new all-time high.
Chase Vs Nifty Drawdown in 2022
During most of the year, Chase had a lower or equal drawdown compared to Nifty. There were only two instances where Chase had more drawdowns than Nifty, represented by the red region in the below chart.
Chase Returns Since Inception
Despite all the geopolitical uncertainties, rising inflation, and high FII selling, Chase outperformed the Nifty by 15 percentage points and gave a 19.3% return against the Nifty return of 4.3%. The below table represents Chase returns since inception.
Monthly Returns in 2022
The first big upmove move that we saw this year, after the furious fall in Feb, was in July and August when the FIIs started investing back into the Indian markets. Chase gave 10.9% and 5.4% returns in July and August respectively. This high return was due to both active and passive components contributing to the Chase returns.
Last year in 2021, Chase gave a 26.5% return with the active component (Nifty Futures) contributing 4.5% and the passive component (ETF) contributing 22%. However, look at how the table turned this year. For 2022, the active component contributed 14.4% while the passive contributed only 4.8%.
Chase Vs Nifty 3 months rolling returns
Capitalmind Chase Vs Nifty Drawdowns Since Inception
Overnight trade Vs Day trade
We received a lot of queries this year with respect to exiting the trade on the same day when it has moved significantly in our favor and re-enter on the next day. However, this is not a good idea because typically the market moves overnight. Here are some stats for reference.
Almost 68% of the points were earned during overnight moves since inception. The percentage is even more for the current year i.e 82%. So if you exit a trade and re-enter on the next day you will lose 68% of your expected gains. Moreover, the next day after the market has opened gap up/ gap down it would become emotionally difficult to re-enter the trade.
So it’s always a good idea to follow the system without any discretion and be in the trade till it hits the stop loss.
More Statistics on Nifty Futures
The active component of Chase has given 4x points this year compared to last year.
- The success ratio has also improved since it has taken less number of trades to achieve more points.
- There is also a sharp rise in the expectancy in 2022. Expectancy is what we expect to make on each trade, based on our win rate and average gains and losses. Last year it was 10 points, and this year it went to 43 points.
- These improvements are because of market behavior over the year and are not related to execution. There were more trends that lasted.
We took 76 trades this year of which 26 were winning trades. Out of the winners, 13 were long trades, and 13 were short trades. So only 13 trades are contributing to Chase NAV since in the short trades, we are hedged (Chase NAV remains flat even when we make points on the short side).
Among the 13 long trades, 3 trades made less than 40 points. So we are left with only 10 trades that are contributing significantly to the Chase return. And that’s why it’s extremely critical to follow the model meticulously because you don’t know when you will get these 10 trades (out of 76 for 2022).
Moreover, Chase is a low win rate strategy with a win rate of ~34%. However, the average wins are almost 3 times the average loss which makes it overall a positive strategy. This year Chase also made a new record of the highest point in a single trade with 1187 points. Overall this year has been really good for the active component, which is evident in the below table.
What’s new in Chase in 2023?
We are currently testing an automated signal generation process and actively discussing its development on slack. We are sharing our learnings, and tweaks to the model, seeking feedback, and building the bot with the community.
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