Written by Peter Huber, Investment Writer and Guillermo Malena, Product Manager
After a sustained period of monetary expansion, deflationary fears have subsided and inflation has surged. In response, monetary tightening by central banks has begun globally. Interest rates in the US and UK have risen sharply in the past year, across the yield curve. This macroeconomic regime shift allows investors to pursue global macro strategies to exploit current opportunities.
This blog demonstrates how to use the SigTech framework to create a simple inflation hedging trend following strategy trading sovereign bonds from across the G10 universe. The strategy’s results are contrasted with those of a common 60/40 equity/bond portfolio. The inspiration for this approach stems from the logic applied in Neville et al. (2021): The Best Strategies for Inflationary Times.
How to Quickly Build a Trend Following Strategy in SigTech
Step One: Define Investment Universe
To create our bond universe we use SigTech’s rolling bond strategy building block. The rolling bond strategy allows for the continual rolling of on-the-run and off-the-run bonds according to the following fully customizable parameters: country, rate, date, tenor, and run type.
The interactive widget below (Figure 2) provides a performance overview for the rolling bond strategy for US 10Y treasuries.
Step Two: Signal Generation
To generate our trading signal we build a rolling 12 month momentum strategy for our bond universe. Its constituents are ranked on performance throughout the life of our strategy, where long positions are taken on the top performing 20% of bonds and short positions are taken on the bottom 20%.
Step Three: Strategy Creation
The signal matrix which ranks our bonds and triggers their respective buy and sell orders can be inputted into a signal strategy to direct our investing. This is done with the aid of the signal strategy building block, which allows users to convert any signal object into a tradable strategy.
In order to compare the performance of our strategy to the performance of a 60/40 equity/bond portfolio, it is necessary to create a strategy that represents the portfolio. For this we use the basket strategy building block which allows us to build a strategy whose underlying assets are rebalanced to fixed weights according to a fixed schedule. Our portfolio is composed of 40% treasury futures and 60% S&P 500 mini futures.Our strategy underperformed in the period of low inflation that preceded the recent monetary policy shift. Yet, as inflation began surging in early 2022, the long/short momentum strategy began outperforming the equity/bond portfolio. 2022 returns reflect this; 13.4% for the former and -13.7% for the latter (see Figure 3).
Global Macro Investment Strategies on the SigTech Platform
The strategy presented in this blog is, by its nature, fairly simple. It would be insufficient for investors developing a comprehensive investment strategy. For instance, when developing a trend following strategy, a wider universe of instruments is preferred, so as to diversify potential exposure. Furthermore, position sizing and the imposition of trading rules is necessary to manage risk and mitigate slippage and commissions. However, these functionalities – and many others capable of adding greater nuance and complexity – are all available on the SigTech platform.
SigTech’s quant technologies platform accelerates and streamlines the research and construction of global macro investment strategies. It offers access to 100+ strategy building blocks, a comprehensive array of financial instruments across all liquid asset classes, and an extensive range of financial and alternative datasets. Our open source code is fully customisable to the individual specifications of the user, freeing investors to focus on research and alpha generation.
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(1) Figures generated on the SigTech platform on November 28, 2022. Data provided by ICE.
This content is not, and should not be construed as financial advice or an invitation to purchase financial products. It is provided for information purposes only and is subject to the terms and conditions of our disclaimer which can be accessed here.