ETF Pairs Trading
Trade based on the relationship of two similar assets - not outright direction
Strategy Description
ETF Pairs Trading is based on another popular hedge fund trading strategy, pairs. Used by the first electronic hedge funds back in the 1980s the concept is based on finding 2 similar assets and measuring the relationship between them. A commonly used example is Coca Cola vs Pepsi, where you have 2 similar businesses. When one is weak and another is strong in technical price action, you go long the weak stock and short the strong stock eventually exiting both at the same time when the relationship returns to normal.
We use the pairs trading concept on ETFs as stocks have more individual tail risk. By doing this we can leverage our portfolio safely 2:1 (200%) and amplify our returns whilst still keeping risk and drawdowns low due to the nature of our pairs trades.
Strategy Objective
Benchmark: S&P 500 Index
To outperform the benchmark on a yearly basis and significantly so in the long term with a lower level of volatility and a low level of correlation.
Investable Universe
All electronic traded funds (ETFs) on US exchanges with at least $1 million dollars in average daily traded value, which is approximately 1,400 funds as of this writing. No leveraged or short ETFs are traded, only plain vanilla long-only funds are included in the portfolio.
Investment Approach
This strategy is part systematic/discretionary in our approach. We have strict criteria for position sizing, # of positions and requirements to enter a new position however we use discretion when choosing the best trade to take out of a list of potential candidates.
We have developed our own unique set of analytical tools to first keep an updated watchlist of ETF pairs that are technically co-integrated, meaning they have a statistically significant relationship of reverting back to the mean after divergence. We also have tools that model the technical relationship between the ETFs that alert us to potential entry points and exit points. We exit all pairs when they come back to our technically calculated mean average level, however we may exit early if presented with a much better opportunity to replace with another pair.
Position Sizing
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We put 40% of the current account value into each pairs trade, 20% per leg
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We have a maximum limit of 5 pairs trades open at any given time
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The maximum total leverage used is 200% (5 pairs x 40% of account value in each)
Trade Frequency
Our pairs trades typically are open for 1-3 weeks, some may be open only for several days and others can last up to 6 weeks. All trades are opened and closed between 2:45 - 3:45 PM EST (in the last hour before market close).
Key Benefits
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Use leverage safely with a pairs trading strategy by trading the relationship of similar assets
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Carry a market neutral portfolio that isn't directionally exposed to the market
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Reduce risk of single stocks and don't worry about earnings surprises & other unknown events
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Trade a wide variety of assets classes including equities, bonds, commodities & strategy funds
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Trade only in the last hour of the market close 5-10 times per month
Strategy Performance
Below is the current performance of the ETF Pairs Trading strategy of a hypothetical $45,000 portfolio following this strategy versus the S&P 500 Index as shown on the chart. The real time performance is tracked by independent 3rd party platform, Collective2 (C2) which includes all brokerage and our subscription fees. All of our trades are entered in real time into the C2 platform and can be publicly verified by anybody.
Cost to Follow
The cost to follow the ETF Pairs Trading strategy is $60/month to receive all trade alerts to your email so you can manually enter the trades into your own trading account.
How to Follow the ETF Pairs Trading Strategy
ETF Pairs Trading is listed on Collective2, a copy trading platform that allows strategy developers to offer strategies for subscribers to follow and copy in real time. Think of Collective2 like an online hedge fund marketplace that anybody can join to find trading strategies to copy.
Follow the steps below to subscribe to the ETF Pairs Trading strategy.
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Visit the ETF Pairs Trading strategy page on Collective2 here https://collective2.com/details/142447715 and signup for $60/month
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Collective2 will now email you all changes to our portfolio in real time. All trades are sent in the last hour before market close, approximately 5-10 times per month. You can enter the trades into your account.
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If you wish to have the trades automatically placed in your Interactive Brokers account then you have the option to sign up for an Auto-trade plan for an additional $49/month with Collective2 who will then automatically place all our trades in your IB account in real time.
After you sign up to our strategy on Collective2, you'll also be added to our members email list and immediately receive details on what current positions our portfolio holds. We also send out a monthly performance report to our members giving ongoing commentary on the markets and how our portfolio is performing so you'll always be aware of what is happening.
If you have any other questions you're welcome to email us at support@clickcapital.io