Industry Specific Hedging

1
Industry Specific Hedging

• Golden Toque Capital
• Carrington Bradley
• Patrick Kane
• Pete Rudnick
• Dennis Wu
• February 26, 2004

2
Agenda

• Introduction
• Industry and Factor Selection
• Screen Results
• Portfolio Performance
• Out of Sample Testing
• Optimization
• Parting Thoughts

3
Introduction

• Industry Specific Comparison
• Are there certain industries that over/under
  perform based vs. the market?
• Cams Merrill Lynch work
• Starting point for variables
• Interest in using FactSet
• Cool and powerful tool
• Get to use a 250,000 laptop

4
Industry Selection

• Based on SIC Codes
• Two digit codes in FactSet
• Minimum of 100 companies listed
• Banking, Energy, Food, Electronics, and Telecom
• Compare to US Common Stock returns for same time
  periods
• 1990 to 2000 in-sample time period

5
Factor Selection

• Based on Quant Stock Selection Class
• Expectational
• Consensus forecast earnings estimate revision
  ratio
• Change in consensus FY estimates
• Momentum
• 1 month Price change
• 3 month Price change
• Fundamental
• Dividend Yield
• Rate of Reinvestment

6
Energy Screen Results
7
Energy Screen Results
8
Banking Screen Results
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Banking Screen Results
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Banking Bivariate Result
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Out of Sample Results
Energy Sector 2001-2002
Reinvestment
1 month momentum
12

Out of Sample Results
Banking Sector 2001-2002
3 month momentum
1 month momentum
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Factor Optimization

• Energy Sector with optimized weights

• Double SP Risk
• 27.3 Return

14
Factor Optimization

• Banking Sector with optimized weights

• 33 more risk than SP
• 31.2 Return

15
Parting Thoughts

• None of our 8 screening factors were effective
  screens for total US stocks
• Screening by return and going long yields average
  monthly return Energy -0.26, Banking 0.16
• Solver optimized weights had correct sign
• Made lots of money, but did not consider trading
  costs

16
Additional Slides
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Factors

• Code 1 1 month price change
• G_PRICE_1MCHG
• Code 2 3 month price change
• G_PRICE_3MCHG
• Code 3 Div yield
• G_DIV_YLD(NR 0 L45D)
• Code 4 Rate of reinvestment
• G_REINV_RATE(NR 0 L45D)
• Code 5 Consensus forecast earnings est.
  revision ratio
• (IH_UP_FY1R(0)- IH_DOWN_FY1R(0))/IC_NEST_FY1R(0)
• Code 6 Change in consensus FY estimates
• IH_MEAN_FY1R_3MCHG
• Code 7 Operating Cash Flow/Sales
• G_CASH_FLOW/G_SALES
• Code 8 Interest Coverage
• G_INT_COV

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SIC 13 Summary Energy
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SIC 60 Summary Banks