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Hurdle Rate

Hurdle Rate

The hurdle rate is used to minimize downside risk of a strategy. Setting the hurdle to a safe asset such as treasuries or money market will require any investment to outperform the hurdle in order to remain in the pool of investment choices for that rebalance period.

For example, if the hurdle rate for a rank by return strategy is set to VUSTX (long term treasuries), then we will only invest in tickers that outperformed long term treasuries over the prior rebalance period. If no family members beat long term treasuries, indicating a down trend in the market, then we retreat to long term treasuries minimizing the downside of the strategy.

Hurdle

The hurdle rate is a minimum value for the ranking metric (return, ftalpha, or sharpe) for each rebalance period. Each family member is compared to the hurdle, and the family member must exceed the hurdle in order to be remain in consideration for the rebalance period.

Ex: when ranking by return and the hurdle rate is set to VFINX, then each member of the family must meet or exceed the return of the VFINX in order to remain in the ranking for that rebalance period.

Replace

Replace indicates whether to replace a ticker that does not meet the requirements with the hurdle ticker or to drop it all together.

For example, if you have a 10 member family, # to Buy = 4, but only 3 members of the family beat the hurdle. If replace is checked, the strategy will buy the three tickers that beat the hurdle, plus buy the hurdle so the number bought equals 4.

But, if replace is unchecked, the strategy will not replace the tickers that do
not beat the hurdle with the hurdle, so there are only three invest-able assets. So, only three tickers will be purchased.

Script

The hurdle script is similar to the hurdle rate, but more advanced. The hurdle script allows the user to define a upper or lower bound for a number of statistics, not just the ranking metric.

Available Statistics
  • ANN = Annualized Return 123
  • CORR = Correlation to the benchmark
  • MA = Moving Average
  • MA = Moving Average Timeline**
  • MDD = Max Draw Down
  • RTN = Return
  • SD = Standard Deviation
  • UI = Ulcer Index
  • UPI = Ulcer Performance Index
Syntax

[statistic] [compare operator] [hurdle ticker or value] , [# months to calculate statistic (optional)]

  • statistic = any time listed above
  • compare operator = “>”, “<“, “=”
  • hurdle ticker or value = ticker symbol used to calculate the hurdle rate or value used for the hurdle rate
  • # months to calculate statistic = time period to calculate statistic defined in months
  • IMPORTANT – Separate multiple statements with a semi-colon (“;”)
** Moving Average Timeline Syntax **

This hurdle has a slightly different script. The other Moving Average compares one length moving average to another length moving average CALCULATED ON THE SAME DAY. ie Dec 31’s 50 day moving average vs Dec 31’s 100 day moving average.

Moving Average Timeline compares a moving averages ON DIFFERENT DAYS. ie Dec 31’s 50 day moving average vs Nov 30th’s 50 day moving average.

MA[moving average length] , [number of months prior to end date (optional)] [compare operator] MA[moving average length] , [number of months prior to end date
(optional)]

Examples

ANN > 5
For each rebalance period, only invest in tickers with annualized return for the time period of more than 5%

ANN > 5,3
For each rebalance period, only invest in tickers with annualized return for the prior 3 months of more than 5%

UI < VFINX,12
For each rebalance period, only invest in tickers with 12 month ulcer index less than the 12 month ulcer index of VFINX

MA50 > MA200
For each rebalance period, only invest in tickers where the ticker’s 50 day moving average is greater than the ticker’s 200 day moving average

MA50,2 > MA50,3
For each rebalance period, only invest in tickers where the ticker’s 50 day moving average 2 months ago is greater than the ticker’s 50 day moving average three months ago

CORR < 90,12 ;UI < VFINX,12
For each rebalance period, only invest in tickers where the ticker’s 12 month correlation to the benchmarch is less than 90% and also have a 12 month UI less than VFINX

Comments

  • Separate multiple statements with a semi-colon (“;”)
  • Capitalization and spacing does not matter
  • If no time period give, then time period is equal to the rebalance period
  • If using multiple statements, ticker must meet ALL statement requirement to remain eligible for the rebalance period