Frequently Asked Questions

The answers to your questions about our process of rules-based investing

How are the models created?

 

We begin the model development process by reviewing academic research, finance journals, and white-paper research.  

We prefer research papers where the strategy is clearly articulated and which also contain some type of risk characteristics (max. drawdown, volatility, etc.). Only a small percentage of strategies pass all of these selection criteria.

We then translate the strategy into a set of specific rules which are then tested using our research platforms and historical market data from S&P Global Market Intelligence.  

The strategy is finally evaluated on its ease of implementation and pracital use.  

What is back-testing?

Back-testing is applying the rules of the strategy to historical , point in time data to determine how a strategy performs within different time intervals and within different market regimes.   

Back-testing is not actual investing.  By testing the results, we can determine how the model could react in future market conditions.  However, we are not predicting the future.  Past performance is no indication of future results.  Gains are not guaranteed; losses are possible.

Who makes trading decisions?

One of the primary advantages to using a rules-based investment process is that it helps reduce the interference of human emotions from the investment process.  

As such, we follow the trading signals explicitly, 100% of the time.  

 

 

When do the models rebalance?

The stock models rebalance weekly. The ETF models rebalance on a monthly basis. 

Research has shown that more frequent rebalancing for our ETF strategies can cause the models to be too sensitive to market noise.  Rebalancing for longer periods, for example, quarterly, causes the model to hold a losing position for a longer time frame and can dramatically decrease a model’s return. 

It should be noted that the rebalancing frequency does not correlate to portfolio turnover. Quite often a strategy will continue to hold the same securities from one period to the next. 

 

Why should I use rules-based models?

Studies show that investors repeatedly underperform the market.  The primary reason investors underperform is because of behavioral tendencies and human emotion.  

Various conditions such as herding, loss aversion, and being scared of repeating past mistakes can prevent investors from making the right choices when investing.  By following a set of pre-determined rules we believe investors are more likely to reach their investment goals.

Models can help eliminate these behavioral flaws by systematically applying the same rules in a consistent and ongoing fashion.

 Additionally, models can be designed to exploit certain “edges” or “factors” that have demonstrated over many years to produce above-average returns.

Where can I find investment advice about the models developed by Drawbridge Strategies?

Drawbridge Strategies is not a registered investment advisor.  The information posted on this site is for information purposes only.

You can contact Drawbridge Wealth, a division of Capital Markets IQ, LLC, a fee-based SEC-registered investment advisor, for investment advice concerning one or more of our models.

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