Magnifying Stock Returns:
How to Leverage the Future with Moving Averages
In their 2016 Charles H. Dow Award winning paper “Leverage for the Long Run”, Michael A. Gayed, CFA and Charlie Bilello, CMT challenge popular notions about leverage and moving averages. They show that volatility and path dependency are crucial to effectively deploying leverage, and quantitatively analyze moving averages to help identify conditions that favor an environment which lends itself to using margin. Join Michael Gayed as he discusses the surprising findings of their research to not only potentially increase returns, but mitigate risk as well. Attendees will have a chance to win a free Kindle Fire at the end of the presentation.
Using leverage to magnify performance is an idea that has enticed investors and traders throughout history. The critical question of when to employ leverage and when to reduce risk, though, is not often addressed. We establish that volatility is the enemy of leverage and that streaks in performance tend to be beneficial to using margin. The conditions under which higher returns would be achieved from using leverage, then, are low volatility environments that are more likely to experience consecutive positive returns. We find that Moving Averages are an effective way to identify such environments in a systematic fashion. When the broad U.S. equity market is above its Moving Average, stocks tend to exhibit lower than average volatility going forward, higher average daily performance, and longer streaks of positive returns. When below its Moving Average, the opposite tends to be true, as volatility often rises, average daily returns are lower, and streaks in positive returns become less frequent. Armed with this finding, we developed a strategy that employs leverage when the market is above its Moving Average and deleverages (moving to Treasury bills) when the market is below its Moving Average. This strategy shows better absolute and risk-adjusted returns than a comparable buy and hold unleveraged strategy as well as a constant leverage strategy. The results are robust to various leverage amounts, Moving Average time periods, and across multiple economic and financial market cycles.
About our Speaker:
Michael A. Gayed, CFA is the Co-Portfolio Manager and Chief Investment Strategist at Pension Partners, LLC, an investment advisor managing mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Michael is an active contributor to MarketWatch and has been interviewed on CNBC, Bloomberg, Fox Business, as well as the Wall Street Journal live for his unique approach to interpreting market movements. His analysis has also been featured by Marc Faber of the Gloom, Boom and Doom Report. Michael earned his B.S. from New York University and is a CFA Charterholder
Date, Time + Location
Friday, June 24th
Noon - 1:30 - Lunch included
CFASF Classroom 6th Floor
235 Montgomery Street
San Francisco, 94104
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