Once an idea is formed, a methodology is created to take advantage of it in the markets. But before that methodology can be implemented, it must be tested.
Flexible Plan Investments, Ltd. follows a rigorous testing protocol for each of its strategies. It begins with back-testing the methodology. Back-testing is essential to gain confidence in a trading approach and to allow for the development and introduction of new strategies. This back-testing process is done in two important ways.
Quantitative investing begins with an idea of how markets should react in various market conditions. It is understood that there is no single solution or Holy Grail for investing. The financial markets are too complex to be so easily conquered. Instead, one must seek to create innovative approaches to take advantage of the various identifiable market inefficiencies—trend following, factor analysis favoring small and value oriented investing, behavioral biases of investors that can be viewed as opportunities for profit, for example.
Testing for robustness
Even with walk forward back-testing, bias can still sneak into the process. One can use historical knowledge to in effect “stack the deck” by only applying the methodology to a universe of asset classes or funds that have a known successful history. Or one can repeatedly run the walk forward testing changing the methodology each time to better suit the data—eventually over fitting the data so that the resulting methodology has little application to a new untried environment.
To avoid these biases, Flexible Plan tests any resulting methodology on universes of investments that were not used, even in the walk forward testing, for the development of strategies. So, if a methodology works well with a universe of global investments, it must also prove effective applied unmodified to an investment portfolio made up of fixed income securities. By applying this multi-tiered testing approach, Flexible Plan gains insights into the likelihood of success of the methodology in future market environments.
New advances in methodology
This same methodology was applied to the development of FPI’s Evolution and Fusion strategies. In addition, new mathematical algorithms were created to further enhance the strategies’ robustness. These new algorithms employ a number of innovative features toward this end:
- A generalization process that forces the investment choices to seek a general rather than a specific solution
- Required usage of rank ordering of investment choices instead of simply processing raw numbers
- Usage of multiple, standard, non-optimized time windows for measurement purposes
- Utilizing return, correlation, and volatility to determine investment choices as well as position sizing
- Making investment choices based on the entire portfolio’s posture rather than solely on the evaluation of the individual asset class
In addition to the individual account information provided to each client, FPI makes available two different sources of performance data.
First, there are GIPS® Composite Performance Reports. FPI claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented these reports in compliance with the GIPS standards. A copy of the verification report(s) is/are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.
Flexible Plan Investments, Ltd. is a federally registered independent investment adviser. Flexible Plan claims compliance with the Global Investment Performance Standards (GIPS). To receive a list of composite descriptions of Flexible Plan strategies and/or a compliant presentation, contact email@example.com or call 800-347-3539.
Second, Model Performance reports of actual accounts trading each of the strategies are available in two formats: a) they can be ordered for a specified time period or b) they are compiled in a mutual fund fact sheet manner where the results are provided for certain set time periods—year-to-date, last quarter, last 12 months, etc. Because Flexible Plan maintains scores of strategies on a wide range of investment platforms, requests for these reports are made on an individual basis rather than in an aggregate.
In choosing an asset management firm, it is essential to evaluate their research capabilities. Creating an investment strategy is not like producing a breakfast cereal, where you put the same flakes in the same box and distribute it every day.
Financial markets are diverse and ever changing. What works in one time period with one set of assets may not work in another. The strategies must be able to develop and change. That can only happen in a firm with a substantial research capability that can continually create, review, and seek to improve its strategies. Asset management firms should not believe that they can simply stand pat in the belief that they have the silver bullet to investment success. Instead, they must be flexible.