FUNDSEEDER TOP TRADER INDEX OUTPERFORMS BOTH EQUITY AND ALTERNATIVE INVESTMENT INDICES
A core objective of FundSeeder Technologies is to discover trading talent worldwide. The FundSeeder platform (fundseeder.com) allows traders to link their accounts directly to FundSeeder and in turn provides traders with free performance analytics and graphics automatically updated daily. These linked accounts (termed “verified” accounts because their performance is based on data received directly from the broker, not the trader) are sourced globally and include traders from more than 112 countries.
The FundSeeder Top Trader Index is an index based on the top 5% of verified accounts on the FundSeeder Platform, with the ranking based on the FundSeeder Score, a proprietary return/risk metric designed to identify top trading talent. The Index is constructed using a methodology that entirely avoids any hindsight. Specifically, at the end of each month, the top 5% of verified accounts, as ranked by FundSeeder score, are used to define an equal-allocation portfolio. This portfolio is then used to calculate the daily returns of the index in the following month. This process is repeated each month.
The performance of the FundSeeder Top Trader Index is based on two key factors:
1. The quality of the traders with verified accounts at FundSeeder, and
2. The efficacy of the FundSeeder Score in identifying traders likely to outperform in the coming month.
The FundSeeder Top Trader Index launched at the start of November 2015. Chart 1 compares the equity curve of the FundSeeder Top Trader Index from inception through the end of 2018 with the corresponding performance of equity (S&P500), hedge fund (HFRX Global Hedge Fund Index), and CTA (SG CTA) indices. These comparative indices were selected because they are broad-based, investable, and reported daily. As can be seen, this plus-three-year time span was a particularly tough environment for alternative investments with both the hedge fund and CTA indices registering net losses for the period: -1.0% and -5.0%, respectively. In sharp contrast, the FundSeeder Top Trader Index was up 27.6 % during the same period. (To be precise, the deviation is not as extreme as these performance differences imply because the HFRX and SG CTA indices embed management and performance fees, whereas the FundSeeder Top Trader Index does not, but this factor does not explain the magnitude of the performance difference).
Admittedly, outperforming the hedge fund and CTA indices during the period in question represents a relatively low bar. What about the performance of the FundSeeder Top Trader Index versus the S&P 500? Here the return difference is significantly reduced with the FundSeeder Top Trader Index achieving a cumulative gain of 27.6% versus 19.5% for the S&P500. But return only tells half the story. The FundSeeder Top Trader Index not only registered a larger gain, but it did so with much lower risk. The annualized volatility of the FundSeeder Top Trader Index was almost half that of the S&P500: 7.2% versus 13.0%. Also the drawdowns in the FundSeeder Top Trader Index were far lower.
Chart 2 provides an “underwater” chart for the four indices. An underwater chart depicts how far each data point is below a prior high. A return to the zero line indicates a new high. Note that there are several double-digit drawdowns in the S&P500 and only one such instance in the FundSeeder Top Trader Index. The maximum drawdown in the FundSeeder Top Trader Index was 10.5% versus 19.8% for the S&P500.
Not surprisingly, the combination of higher returns and lower risk result in much higher return/risk ratios for the FundSeeder Top Trader Index versus the S&P500. For the period depicted, the Sharpe ratio for the FundSeeder Top Trader Index was 1.10, more than double the S&P500 level of 0.50. The Gain to Pain ratio (based on daily data) was also more than twice as high: 0.22 versus 0.10.
The cross-correlation table below summarizes the cross-correlations between the indices depicted in the above charts. Some alternative indices, such as CTA indices, are uncorrelated to equities. The 0.13 correlation between the SG CTA index and the S&P500 implies that equities explain less than 2% of the price variation in the CTA index. Hedge fund indices are significantly correlated to equities, but provide some diversification. The 0.75 correlation between the HFRX Global index and the S&P500 implies that a little more than half of the price variation in this hedge fund index can be explained by equity price movements—a substantial amount, but still well below the correlations between long-only equity funds and the S&P500, with the latter typically explaining over 90% of the price movements in the former. It is noteworthy that the correlation between the FundSeeder Top Trader Index and the S&P500 is lower than the correlation between the HFRX and the S&P500: 0.63 versus 0.75. So not only has the FundSeeder Top Trader Index generated much better returns than the HFRX, it is also less correlated with equities.