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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
CORR= Correlation to the benchmark
MA = Moving Average
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)]

*Separate multiple statements with a semi-colon (“;”)

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

Examples

  1. ANN > 5
    For each rebalance period, only invest in tickers with annualized return for the
    time period of more than 5%
  2. ANN > 5,3
    For each rebalance period, only invest in tickers with annualized return for the
    prior 3 months of more than 5%
  3. 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
  4. 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
  5. 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