WE HAVE A NEW, DYNAMIC, OPTIMAL, LOWER RISK MARKET INDEX
Most market indices are static meaning that their weights do not change (often). Existing market indices have big volatilities and drawdowns. However, applying asset allocation theory, we can, from the same set of index constituent stocks, construct a new dynamic index that is “optimal”, with higher sharpe ratio and lower volatility.
Since in 1952 Markowitz published the first and seminal paper in asset allocation using mathematical model, there are more than 60 years of empirical experiences and more than 1000 academic papers that show that equal-weighting (1/N) is a very tough benchmark to out-perform.
Existing market indices are usually capitalization-weighted.
The cause for failure in most models is that the knowledge of expected returns and covariance are required.
NMSAAM’s fundamental innovations are:
1. we assume that expected returns and covariances are not available and therefore are random.
2. we have efficient ways to estimate the distributions of expected returns and covariances.
We use SZ50 China as the benchmark, we compare the NMSAAM Index to it from January 2015 to December 2017.
Our results show that NMSAAM outperforms the market index in an absolute majority of wide range of parameters hence stability.
On top of that, NMSAAM outperforms the market index in terms of a number of measures hence lower risk.
Empirical Results (SZ50, China)
Even without filtering and comparing using all (reasonable) parameters, our dynamic portfolios already outperform SZ50 consistently:
–93.75% of our portfolios better than the index in terms of Sharpe Ratio.
–73.44% of our portfolios better than the index in terms of final P&L.
By selecting a stable parameter plateau, our result shows that NMSAAM index is unambiguously superior than the original index:
–100% of our portfolios better than the index in terms of Sharpe Ratio and P&L.
–Sharpe Ratio 27.11% better than the index.
–Final P&L 18.87% better than the index.
In summary, not only does NMSAAM index provides a better return in terms of P&L, it also provides a lower risk alternative than the index in terms of lower volatility and lower max drawdown
Underwrite NMSAAM index funds/ETFs:
–They are more attractive to risk adverse investors, such as banks, insurance companies, pension funds, who have little risk appetite.
–Funds/EFTs are tailored to the risk appetite of different investors.
–They are more effective tools for portfolio hedging.
Using NMSAAM index as the underlying asset, underwrite call options to investors who want principal protection.
Using NMSAAM index as the underlying asset, underwrite futures, calls, puts.
Using NMSAAM index as the underlying asset, underwrite derivatives and structured products.
Because of our sole ownership to NMSAAM index, we have the monopoly to the businesses derived from the index.
There are multi-billion dollars of new businesses: funds + futures + vanillas + derivatives:
–S&P 500 has over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total.
NMSAAM indices for different markets/countries:
–S&P 500 vs. NMSAAM-S&P 500
–HSI vs. NMSAAM-HSI3
–CSI 300 vs. NMSAAM-CSI 300
–FTSE 100 vs. NMSAAM-FTSE 100
–Nikkei vs. NMSAAM- Nikkei
In each country, e.g., China, USA, we are looking for a tier 1 financial company to promote and market NMSAAM index
–essentially building a corporation similar to MSCI (US$12B).