Hi there. A paid subscriber recently asked if I could replicate two award-winning allocation papers that claim to deliver extraordinary Sharpe ratios and returns with very mild drawdowns. The papers build on an elegant rotation framework, ranking assets such as sector ETFs by multiple signals and combining them with a hedging portfolio meant to protect against turbulent periods and black-swan events.
I took up the challenge, ran the data, and quickly found myself unable to replicate the main results, just as the subscriber had struggled as well. However, despite my very different replication results, I find the rotation signals interesting and useful in a broader allocation framework.
More below on the two papers, how I tested the models, what the results look like, and how the sector rotation signals still can be useful…
