MarketGrader 100 Index


About

The MG 100 Risk-Managed Index combines the MG 100, a flagship MarketGrader core U.S. equity benchmark, with the Kaizen Dynamic Risk Overlay Index. The objective is to provide investors with a measure of the capital appreciation opportunity in the U.S. equity market that minimizes the negative impact of bear markets.

During periods of significant downward pressure on U.S. stocks, the Dynamic Risk Overlay aims to preserve MG 100's significant upside capture statistics, enhancing its capital appreciation properties over time. Over full market cycles, this has the effect of improving the Index's risk/return profile and outperformance potential relative to other diversified equity benchmarks.

The cumulative performance of the MG 100 Risk-Managed Index, with an inception date of April 2004, is charted below alongside the S&P 500 and the MG 100.


MG 100 Risk-Managed
*Chart Data as of: Nov. 30, 2015


How the MG 100 Risk-Managed Index Works

The Dynamic Risk Overlay utilizes a rules-based hedging technique that is automatically triggered under certain conditions common to past systemic events. The proprietary process is governed by expected market volatility, using the VIX and associated measures of stress to gauge the drawdown potential in equities. When the hedge signal is on, the Index allocates 30% to certain VIX futures contracts. In times of market stress, VIX futures increase in price as participants rush to hedge risk, typically providing uncorrelated returns with equities. In this manner, the VIX futures act as catastrophe insurance, paying out when equities experience prolonged drops or volatility.

The Index never sells or shorts the MG 100; it is always long equities. This decreases risks associated with other hedging techniques. As measured by price returns on the VIX futures, the Dynamic Risk Overlay signal provides a positive return in roughly half the instances the hedge is applied. The performance drag on the Index of a hedge placed when VIX futures prices drop is a fraction of the positive contribution when VIX futures rise.

This replicable and systematic process delivers an effective hedge that is only applied tactically. Based on historical conditions since the April 2004 inception of the backtested results, the hedge has been activated 5% of trading days and about one quarter of months on an annualized basis. During normal market conditions, the hedge is not activated, allowing the proven strength of the growth at a reasonable price (GARP) stock selection methodology that governs the MG 100 to fully drive performance.



Index Cumulative Rtn Ann Rtn Ann St Dev Max DD Sharpe Ratio Sortino Ratio Up Capture vs S&P500TR Down Capture vs S&P500TR Monthly Correl. S&P500TR
MG 100 Risk-Managed Index 460.7% 15.8% 18.6% -19.4% 0.85 1.42 212% 20% 63%
S&P500 Total Return 136.2% 7.6% 14.2% -50.9% 0.53 0.67 100% 100% 100%
Index 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
MG 100
Risk-Managed Index
12.6% 18.5% 6.6% 32.3% -7.2% 40.5% 19.4% 17.4% 17.2% 42.7% 4.0% -11.9%
S&P500 Total
Return
9.0% 4.9% 15.8% 5.5% -37.0% 26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.4%

Results
  1. Smaller drawdowns during bear markets and substantial upside capture during normal and bull market conditions.
  2. Improved risk-adjusted returns.

For more information on the mechanics of the Dynamic Risk Overlay, see the MG Risk-Managed Indexes page.




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