To gauge the efficacy of the CAATS algorithmic trading system, each new version of the algorithm is extensively back-tested over a period spanning more than a decade. On this page we present results from the first generation CAATs algorithm, for which a full set of results are available.

For back-testing, several model portfolios were constructed using an opportunity set of 17 issuers spanning the industry and credit spectrum. The selection of issuer firms for inclusion in the opportunity set was heavily biased towards ‘event’ names that were known to have experienced credit events or large swings in credit quality; this was to test the adaptability and resilience of the algorithm.

The charts below show clearly how all combinations of portfolio returns mainly outperform the peer industry benchmark, the HFRI Credit Arbitrage Index, while showing comparable Sharpe ratios.

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These results relate to a credit default swap (CDS) vs. equity shares relative value strategy. In its current format, CAATS identifies new opportunities for taking long or short risk positions in single name CDS and equity shares relating to the same issuing firm, while it also determines the appropriate holding period for any existing positions. This results in two complementary P&L streams: one for each asset class.

Portfolio compositions reflected credit category of issuers as well as degree of leverage employed. Credit categories were divided into Investment Grade (IG), HiVol and High Yield (HY), based on credit spread at time of entering trade. Moderate degrees of leverage are also considered at 0.5x and 1x turns. No portfolio optimization has been applied.

The performance horizon spans the years 2010 to 2021, while the algorithm, which incorporates more experience with time, is initially trained on the preceding 2008 to 2009 period.

The summary table below lists the selection of US-based single name issuers forming the model portfolio, along with ticker and overall performance metrics for each. All trades are of a standard size of $10m CDS notional or equivalent equity risk position, can be long or short and are held for no longer than 35 trading days.

Single Name Performance Summary (2010-2019)

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