V4 - Back Testing Results

Below are given back testing results of V4, generated by the back testing software. These results should be considered as extrapolation into the past of V4 - Volatility Trading Program, which started live trading on April 1, 2015. Performance fees (20% of new net profit above high water mark) are not deducted from back testing results. To see actual trading results, please go to the Performance page.

Back testing results (of the latest, currently traded strategy) can be found in this spreadsheet (ver.03/2015). Results do not take into account bid/ask spreads and interest on short sale proceeds. Actual annualized rates of return (before performance fees) should be around 94% of theoretical returns.

- Based on 74 months of back testing history, the strategy looks very promising. The variability of returns is relatively low and the Sharpe Ratio is excellent. The strategy is extremely robust i.e. relatively insensitive to parameter changes (it is not a curve fitted, or over optimized system), which usually anticipates excellent performance in forward trading, following the back testing period.

- Transaction costs and negative interest (on hard-to-borrow equity) are very low (only 1% of net asset value per annum), relative to average annualized rate of return (around 15% per annum). Since bid/ask spread costs and interest are around 1/15 of the theoretical return, actual rates of return should be around 94% of theoretical returns.

- The strategy trades liquid instruments (VXX ETNs) and has large capacity. By gradually accumulating positions during the trading day the strategy can trade accounts of virtually any size without performance degradation.

- The strategy is not much affected by price slippage, as it trades liquid trading instruments and makes relatively small position adjustments during the trading day. Hence, the actual trading results are very close to hypothetical results. See "Transaction costs" above.

- V4 has relatively shallow drawdowns and, due to the excellent profitability, back testing says the strategy recovers faster than it loses.

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

VAMI

2009

0.59%

0.00%

0.26%

1.26%

(0.59%)

1.37%

(0.40%)

2.06%

3.43%

8.20%

1,082.0

2010

1.38%

2.99%

5.32%

(0.41%)

(4.47%)

(0.51%)

1.55%

(1.47%)

3.68%

6.23%

1.13%

6.22%

23.22%

1,333.2

2011

3.66%

1.44%

(0.98%)

4.94%

2.16%

(0.04%)

(2.59%)

(4.68%)

0.00%

(1.48%)

(0.41%)

1.20%

2.87%

1,371.5

2012

6.32%

1.68%

7.39%

0.47%

(6.79%)

5.02%

2.71%

4.07%

5.77%

(0.74%)

4.71%

(1.78%)

31.78%

1,807.3

2013

5.02%

0.60%

2.99%

2.00%

(0.23%)

(1.72%)

5.63%

(2.37%)

2.91%

2.80%

1.94%

1.33%

22.64%

2,216.5

2014

(3.19%)

2.50%

1.16%

0.96%

2.52%

2.03%

(1.06%)

1.80%

(1.53%)

(0.04%)

1.60%

(3.65%)

2.88%

2,366.8

2015

(4.08%)

6.19%

1.56%

Start of live trading - see the V4 Real Performance page.

2. Back Testing Performance Statistics (Before Performance Fees)

Strategy Returns (Before Performance Fees)
Testing period (74 months)	Mar/2009 - Mar/2015
Net profit on fixed capital without/with monthly profit reinvesting	89.34% / 135.9%
Sum of positive/ negative monthly rates of return - ROR (gross gain / gross loss)	134.8% / (45.12%)
Compound average annualized ROR	14.93%
VAMI - Growth of $1,000, compounded monthly (fees not deducted)	2,359.0
Monthly Profit Factor (Profit to Loss Ratio); (sum of positive RORs) to (sum of negative RORs)	2.98
# Profitable months / average positive ROR	46 / 2.93%
# Losing months / average negative ROR	24 / (1.88%)
Kurtosis of monthly RORs	0.07
Skewness of monthly RORs	(0.13)
% Profitable months	65.7%
Ratio avg. positive / avg. negative monthly ROR (Gain to Loss Ratio)	1.55
Max. # of consecutive profitable / losing months	6 / 3
Maximum / minimum monthly ROR	7.39% / (6.79%)
Maximum / minimum daily ROR	2.96% / (3.85%)
Maximum / minimum 5-day rolling ROR	5.97% / (7.17%)

Risk Measures
Annualized standard deviation of monthly RORs	10.00%
Annualized d ownside deviation (MAR = RF return of 3% per annum)	6.11%
Sharpe Ratio, annualized (RF rate of return 3.0%)	1.39
Sortino Ratio, annualized (below RF ret. 3%)	2.28
Calmar Ratio (ratio compound average annual ROR to worst intra month drawdown)	1.67
Omega Ratios	N/A
Tracking error, relative to the S&P 500 Index, annualized	12.12%
Historic 5-day Value at Risk (VaR); (for 95% and 99% confidence levels)	(2.42%) / (4.28%)
Alpha relative to the S&P 500 Index, annualized	8.32%
Beta coefficient, relative to the S&P 500 Index	0.39
Jensen's Alpha relative to the S&P 500 Index, annualized	8.13%
Active premium, relative to the S&P 500 Index, annualized	(1.12%)
Information Ratio, relative to the S&P 500 Index	(0.12)
Worst month-to-month drawdown depth / duration	(8.93%) / Jun/11-Apr/2012
Worst peak-to-valley (intra month) drawdown	(9.89%)
Longest recovery period	170 days

Basic Strategy Characteristics
Strategy name	V4
Type of trading	S&P 500 Vol. Index trading
Portfolio composition	VXX ETNs
Margin to equity ratio	Max 13%
Maximum strategy leverage	0.25
How generated	Back testing - hypothetical
Start of live trading in the Managed Account Program:	April 1, 2015

Turnover / Cost Parameters
Average position value, relative to NAV	25%
Average daily portfolio turnover (daily traded positions value as a percentage of NAV)	0.7%
Annual turnover ratio	1.85
Average annual transaction costs - bid/ask spreads and commissions (deduct from annual ROR)	1% of NAV per annum
Average transaction bid/ask spread and commission cost, as a fraction of the transaction value	0.1%

To see more back testing results, download this Excel spreadsheet (V4 - V.06/2013). Explore all Excel worksheets (click the tabs at the bottom) and scroll down all worksheets to see graphs and performance analytics.

PLEASE ANALYZE AND THOROUGHLY UNDERSTAND THE RISK / DRAWDOWN PARAMETERS ABOVE AND THE DRAWDOWN CHART BELOW BEFORE YOU DECIDE TO INVEST IN THE PROGRAM. AS WITH ANY TRADING PROGRAM, THERE IS NO GUARANTEE THE SYSTEM WILL NOT EXCEED THE WORST DRAWDOWN FROM THE PAST. WE DO NOT RECOMMEND INVESTING MORE THAN 1/3 OF YOUR TOTAL INVESTMENT PORTFOLIO IN ANY PARTICULAR PROGRAM, INCLUDING V1D - VOLATILITY TRADING PROGRAM.

3. Performance Graphs and Histograms

Compounding is an efficient method for increasing your account equity exponentially, by reinvesting the profit (see the VAMI chart above). You can see these formulas for ROR calculations and compounding. By reinvesting profits and compounding monthly, a $50,000 principal (without yearly additions, at 15% annual ROR, after fees) can grow into $1,000,000 in 20 years - try this Financial Calculator.

The above tables and charts document V4's historical hypothetical performance based on back testing results. To see actual trading results, please go to the Performance page.

Please note that performance results reported are before performance fees, which decrease returns. Interest on open positions is not taken into account in hypothetical results. There may also be slight differences in profit/loss on different platforms.

Better results (smaller drawdown and better Sharpe and Sortino Ratio) can be obtained by trading the V1, V2 and V4 Volatility Trading Programs combined. The three Volatility Trading Programs can be further combined with our four currency trading programs (FX Quant 11, FX Index Arb, FX Basket Quant) - see this 6-strategy composite back testing report.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PLATFORMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

THE RISK OF LOSS IN TRADING EQUITIES AND ETFS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION AND INVESTMENT OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. TRADING EQUITIES IS SPECULATIVE AND MAY INVOLVE THE LOSS OF PRINCIPAL; THEREFORE, FUNDS PLACED UNDER MANAGEMENT SHOULD BE RISK CAPITAL FUNDS THAT IF LOST WILL NOT SIGNIFICANTLY AFFECT ONE'S PERSONAL WELL BEING. THIS IS NOT A SOLICITATION TO INVEST AND YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTION. PLEASE SEE THE COMPLETE RISK DISCLOSURE.