Trend-Following Buyback Achievers

Yoshiharu Sato
Working Paper
First Draft: April 24th, 2016
This Draft: June 18th, 2016

Figure 1: 5-year performance comparison between our strategy and S&P 500

Abstract
US stock buyback data shows that issuers themselves are major buyers in today's US equities
market. Companies buy back more of their own shares as the market rises and fewer as it falls, as
they have more capital for buybacks during the upturns than they do during the downturns. This
particular characteristic of stock buybacks provides investment opportunities for trend following. In
this paper, we propose a low-frequency systematic equity strategy combining the NASDAQ US
Buyback Achievers Index (DRB) and a historically proven trend-following strategy. Despite its
simplicity, a 5-year backtest result of our long/short strategy shows a 267% total return in the
period, with the Sharpe ratio of 2.0. Our analysis explores the advantages of combining the two
concepts into a single portfolio.
Keywords: Systematic Trading, Low-Frequency Trading, Trend Following, Stock Buyback

E-mail: yoshi2233@gmail.com

1.

Introduction

Systematic trading methodically defines trading rules using both technical and fundamental analysis
as well as various other quantitative methods. It is systematically composed of data
aggregation/management, trading signal generation, portfolio P&L tracking, risk
management/control, and trading order routing/execution. In pursuing a systematic approach to
investing, quantiative analysts and researchers 1) collect a large amount of data from a diverse
range of sources, 2) analyze the data in the search for persistent and exploitable patterns for profit
making, and 3) encode trading rules into a computer algorithm so as to extract alpha from the
identified patterns.
Thanks to its rule-based decision making, systematic trading allows investors to react
consistently to market movements, and thereby control their emotional and behavioral biases
(which all too often lead to trading losses by discretionary investors). Systematic trading also allows
24-hour automated trading over multiple markets using multiple strategies, capturing as many profit
opportunities as possible while simultaneously minimizing risk.
It is estimated that nearly 10% of the worlds US$87 trillion AUM are already invested
systematically the US$8 trillion of which are said to be invested in index-tracking or passive
products [1]. (An index itself is systematic as its computation is based on a set of trading rules.)
What is worth mentioning also is that assets managed by hedge funds have risen by 70% from 2008
to 2014 at US$2.8 trillion, while AUM within systematic macro (one of the most extensive
applications of systematic trading) strategies have increased by 80% during the same period,
comprising about US$300 billion of the hedge fund total (Figure 2) [2].
Figure 2: Systematic macro in hedge funds

Image source: Pensions and Lifetime Savings Association [2] (p.14)

In this paper, we propose a low-frequency systematic equity strategy combining the NASDAQ US
Buyback Achievers Index (DRB) [3] and a trend-following strategy that would have been profitable
over the past 200 years [4]. Despite its simplicity, a 5-year backtest result of our long/short strategy
in the US equities market from April 2011 to April 2016 shows a 267% total return in the period,
with the Sharpe ratio of 2.0, the Sortino ratio of 2.75, and the maximum drawdown of -16.25%.
The rest of this paper is consisted as follows: In Chapter 2 we discuss stock buybacks in the
US equities market. In Chapter 3 we describe a trend following strategy. Subsequently, we discuss
the backtest performance of our strategy in Chapter 4.

2.

Stock Buyback

Stock buyback is the repurchase by a listed company of its own stocks. Companies repurchase their
stocks by distributing cash to existing shareholders in exchange for a fraction of their equities,
which results in a reduction in the number of outstanding shares. This is in contrast to dividends,
which similarly distributes cash to existing shareholders but do not reduce the number of shares.
Companies, after repurchasing their shares, subsequesntly either retire/absorb the repurchased
shares or keep them as treasury stocks for future re-issuance. However, both in buybacks and
dividends, the corporate value of a firm remains the same.
The primary purpose of stock buyback is four-fold: 1) increasing the value of the remaining
shares (e.g., against dilution or undervaluation) by reducing supply in the market; 2) eliminating
potential threats by shareholders looking for a controlling stake of the company; 3) improving the
company's financial ratios (e.g., ROA, ROE and EPS), and last but not least; 4) legally capturing
insider-trading like gains as it is encouraged by regulators. In either case, stock buyback signals that
the company has a sufficient amount of cash to do so.
Figure 3: Buybacks vs dividends

Data source: Credit Suisse [5] (p.12)

As Figure 3 shown above illustrates, dividends were a more preferred way of companies to
distribute cash back to shareholders before the Securities and Exchange Commision (SEC)
introduced in the 1980s a rule which made it easier for companies to repurchase their own stocks. It
also shows that buybacks are more volatile than dividends, which is the biggest criticisms of
buybacks. The volatility of stock buybacks is attributed to the fact that companies typically buy
back more as the market rises and fewer as it falls, since they have more capital (cash) for buybacks
during the upturns than they do during the downturns. This particular characteristic of stock
buybacks provides investment opportunities for trend following (which we discuss in the next
chapter).
A Bloomberg article in March 2016 [6] argues that stock buyback has been playing a crucial
role in the bullish trend of the US equities market since 2009. It reads: "Standard & Poor's 500
Index constituents are poised to repurchase as much as $165 billion of stock this quarter,
approaching a record reached in 2007. The buying contrasts with rampant selling by clients of
mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one
3

of the biggest quarterly withdrawals ever". It is therefore conceivable that issuers themselves are
now major buyers in the US equities market, and that they have been helping prop up the bull
market that is entering its seventh year. In fact, as Figure 4 [14] illustrates, buybacks constitute the
largest shares of the total cumulative real equity demand from 2008 to 2015 in said market.
Figure 4: Total cumulative real equity demand (2008-2015), US$ billion

Image source: EconomPic [14]

SEC rules state that, companies are required to pause stock buybacks during a so-called blackout
period, which lasts about 5 weeks before each companys earnings release until 48 hours after
announcement. The blackout period means a slowing in the pace of buybacks, leaving equities
vulnerable to negative catalysts. As Figure 5 [7] illustrates, US equity flows have seen substantial
declines during the buyback blackout periods.
Figure 5: S&P 500 and equity flows

Image source: Zero Hedge [7]

A good way to capture buyback activities in the US equities market is the NASDAQ US Buyback
Achievers Index (DRB) [3]. It is comprised of US listed companies that have effected a net
reduction in shares of 5% or more in the trailing 12 months. More specifically, the eligibility criteria
4

for the index are as follows:

Be listed on the NASDAQ, the New York Stock Exchange or the NYSE MKT.
The issuer of the security must be incorporated in the United States or certain benefit driven
countries.
The security must have a minimum average daily cash volume of $500,000 in October,
November and December.
The issuer of the security must have effected a net reduction in shares outstanding of 5% in
the trailing 12 months.
One security per issuer is permitted.
The issuer of the security may not have entered into a definitive agreement or other
arrangement which would likely result in the security no longer being eligible.
The issuer of the security may not be issued by an issuer currently in bankruptcy
proceedings.
Figure 6 shows a performance comparison between the DRB index and the S&P 500 index during a
3-year period from April 2013 to April 2016. Before the market decline in August 2015, the DRB
index had outperformed S&P 500 by 10%12%.
Figure 6: DRB vs S&P 500

Image source: Google Finance

3.

Trend Following

Trend following is one of the most common investment strategies pursued by systematic funds. It
tries to take advantage of market trends by observing the current market direction to decide whether
to buy or sell in the hope that the trend continues for a sufficient amount of time to make profits. A
market trend is a tendency of a market price to move in a particular direction over time. Trend
following therefore is a strategy based on technical analysis of market prices rather than on the
fundamental strengths of companies. Trend followers can benefit from both rising and falling prices
by going long and short on securities.
There are various techniques and methodologies that may be used to determine the market
direction to generate a trading signal, the most popular ones of which are moving averages and
5

channel breakouts. Trend followers generally do not aim to forecast or predict specific price levels;
they simply jump on the trend and ride it, and they normally enter in the market only after
observing that the trend is properly established. If there is a turn contrary to the current trend, they
exit and wait until the turn establishes itself as a new trend in the opposite direction.
The key reasons for trending markets are a number of behavioral biases that cause market
participants to over-react [8], namely:
Herding Effect: After a market trend is established, many investors jump on the same
bandwagon, thereby prolonging the trend further.
Confirmation Bias: Investors tend to look for information that confirms their existing
views and beliefs, and to discard information that contradicts them. This can lead them to
buy the winner and sell the loser, causing trends to persist.
Risk Management: Some risk-management models urges investors to sell in downtrends
and to buy in uptrends, causing trends to continue.
Over the history, trend-following strategies have achieved compelling long-term returns for
investors. Lemprire et al. [4] find evidence that their trend-following strategy identified by Eq. 2
would have been consistently profitable over the past 200 years. This finding is in a stark contrast to
traditional theories of finance (e.g., the efficient market hypothesis; EMH), which claim that market
prices reflect all available information and thus it is impossible for investors with strategies based
solely on past prices to be consistently successful.
Lemprire et al. [4] define a trend indicator as follows:

s n (t)=

P(t1) p n , t1
n (t1)

(1)

where <p>n,t is the reference price level at time t, computed as the exponential moving average of
past prices with a decay rate equal to n months, and n is the volatility computed as the exponential
moving average of the absolute monthly price changes with a decay rate equal to n months
(specifically, they select the value of n as 5).
They subsequently define the average strength of a trend as the statistical significance of
fictitious P&L of a risk-managed strategy that buys or sells (depending on the sign of sn) a quantity
n-1 of the underlying contract :

Q (t )= sign [s n (t ' )]
n
t ' <t

p(t ' +1) p(t ' )

n(t ' 1)

(2)

The performance of the trend-following strategy defined by Eq. 2 over the past 200 years on seven
stock indices, seven 10-year government bonds, six currencies, and seven commodities is shown in
Figure 7 [4]. The high profitability of the strategy both across time and asset classes suggests that
trends have been a very persistent feature of all the markets.
High profitability of trend-following strategies, as exemplified by the above one, is
explained by the concept of reflexivity, which was mainly developed by George Soros [13],
chairman of Soros Fund Management. Reflexivity refers to circular, bidirectional relationships
between cause and effect wherein they affect one another, thereby creating a feedback loop. Neither
can thus be clearly assigned as the sole cause or the sole effect in such relationships. Reflexivity
helps explain the interactive nature between human consciousness and reality: In financial markets,
it states that asset values are not always driven by the economic fundamentals but often by the
fallible assumptions and subsequent actions of participants (i.e., cognitive bias) spreading across the
market. This leads to markets having procyclical boom-and-bust disequilibrium, to which the
neoclassical equilibrium theory, such as the EMH, does not apply.

Figure 7: Fictitious P&L of the trend-following strategy

Image source: Lemprire et al. [4] (p.10)

4.

Trend-Following Buyback Achievers

4-1. Strategy Overview

We have thus far discussed the importance of stock buybacks in the US equities market as well as
the stable profitability of trend-following across all asset classes over the history. Our lowfrequency systematic equity strategy combines both two concepts in a single portfolio. Specifically,
we long stocks 1) whose issuers have effected a net reduction in shares outstanding of 5% in the
trailing 12 months (i.e., buyback achievers) and 2) whose close prices are above the exponential
moving average of past prices with a decay rate equal to 5 months (i.e., trend following).
Conversely, we short stocks which do not meet the above-mentioned criteria. The weights of long
and short positions in the portfolio are 100% and 80%, respectively.
In order to choose the portfolio for our strategy, we rank stocks based on momentum i.e.,
price change in percentage over four separate time periods: 120, 140, 160, and 180 trading days. We
also look at the up-down ratio over more recent time intervals (20, 60, and 120 trading days) to try
to guard against rising streams that are showing signs of diminishing investor enthusiasm. We
convert each of these momentum factors into a percentile score and combine them into an overall
rank (normalized as 100 for the best and 0 for the worst). We then long the top 20 stocks from the
ranking and short the bottom 20 stocks. Our strategy's rebalancing period is 1 year, which is ideal in
terms of minimizing the transaction cost with a low turnover (n.b.: turnover is calculated by
tracking the total amount bought or sold to the portfolio size).
Illiquid small-cap stocks are excluded from our stock selection. More specifically, we
exclude stocks which do not meet any of the following liquidity filters:
The product of the daily volume and the day's close price exceeds US$100,000 in 45 out of
the past 50 trading days.
The daily volume exceeds 100,000 shares in 45 out of the past 50 trading days.
The stock price is above US$1.
The market capital exceeds US$50 million.
7

4-2. Backtest Result

In order to backtest our strategy using historical price and fundamental data, we implement the
strategy on Portfolio123 [9], which allows online users to create systematic equity strategies using
various fundamental and technical functions with a vast amount of historical data from S&P
Compustat [10]. Our backtesting period ranges from April 23 rd, 2011 to April 23rd, 2016. For
transaction costs, 0.35% slippage and 2% carry cost for short positions are assumed. Performance is
measured with the Sharpe and Sortino ratios.
Table 1 below shows the backtest result of our strategy in the 5-year period. The total return
is 267.32% (29.71% p.a.) with the maximum drawdown of -16.25%, while the total return of S&P
500 during the same period was 56.26% (9.33% p.a.). The Sharpe and Sortino ratios of our strategy
are 2.00 and 2.75, respectively. The standard deviation is 14.67%, with a 0.2 correlation to S&P
500. The beta and alpha of the portfolio are -0.22 and 36.36%, respectively. Figure 8 shows the
return, turnover, number of positions, maximum return, and leverage of the portfolio during the
backtest. Table 2, 3, 4, 5 and 6 show the stocks selected for the portfolio on each annual rebalancing
date with corresponding ranking percentiles.
We also run another backtest of our strategy with the number of stocks in the portfolio
reduced to 20 (i.e., 10 long positions and 10 short positions). All the other parameters and cost
assumptions are unchanged from the previous test. The result is shown in Table 7 and Figure 9. The
total return of the strategy is increased to 422.99% (39.20% p.a.).
Table 1: Backtest result of our strategy (S&P 500 as a benchmark)
Total
Return

Annual
Return

Max
DD

Sharpe

Sortino

StdDev

Correl
Bench

RSquared

Beta

Alpha

Strategy 267.32%

29.71%

-16.25%

2.00

2.75

14.67%

-0.20

0.04

-0.22

36.36%

S&P 500

9.33%

-19.62%

0.69

0.96

13.56%

N/A

N/A

N/A

N/A

56.26%

Rank Dt
5 2015-04-18
4 2014-04-19
3 2013-04-20
2 2012-04-21
1 2011-04-23

#Lng #Shrt New Pos Sold Pos Turn Ret%

Excess% Costs Cash
StdDev
20
20
37
37 92.5 13.9708
14.2242 1.9844 274.2706 41.1677
20
20
40
40 100 45.2435
33.5423 1.629 188.5046 54.3281
20
20
38
38
95 24.8205
4.8533 1.1733 151.0665 55.8962
20
20
37
37 92.5 22.7623
9.9428 0.7707 123.3524 44.5563
20
20
40
0
0 55.1614
52.066
0.35
79.72 34.7123

Figure 8: Return, turnover, number of positions, maximum return, and leverage of the
portfolio

Table 2: Stock portfolio for our strategy selected in April 2011

Trans
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LONG
LONG
LONG
LONG
LONG
LONG
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LONG
LONG
LONG
LONG
LONG
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT

Name
Tempur Sealy International Inc
Biogen Inc
Dillard's Inc.
Timberland Co (The)
NewMarket Corp
Maxygen Inc
GameStop Corp.
Lorillard Inc
Anthem Inc
IAC/InterActiveCorp
Toro Co (The)
AutoZone Inc
Star Gas Partners LP
CGI Group Inc.
Verisign Inc
Arch Capital Group Ltd
Brightpoint Inc
Employers Holdings Inc
RenaissanceRe Holdings Ltd
Medco Health Solutions Inc.
GAIN Capital Holdings Inc
SemiLEDs Corp
China Integrated Energy Inc
FiberTower Corp
Duoyuan Global Water Inc
Anacor Pharmaceuticals Inc
American Superconductor Corp
Genco Shipping & Trading Ltd
SmartHeat Inc
EnerNOC Inc
Gulf Resources Inc
Kingold Jewelry Inc
A-Power Energy Generation Systems Ltd
Comverge Inc
China Valves Technology Inc
Telestone Technologies Corp
Advanced Battery Technologies Inc
New Energy Systems Group
Orbitz Worldwide Inc
Hanwha Q CELLS Co Ltd

10

Start
End
Pct
Rank MktCap
61.08 65.12
6.61 97.88
4227.52
100.28 125.85
25.5 97.43 24090.71
42.61 58.55
37.4 96.66
2755.34
43.94 42.99 -2.16 96.34
2261.98
148.81 164.38 10.46 90.87
2485.45
2.17
2.37
9.39 90.11
149.56
22.85 19.42 -14.99 83.05
3874.84
27.3 39.37 44.23 80.75 14583.87
66.18
65.7 -0.72 77.72 27299.05
29.56
43 45.45 76.66
2834.85
31.06 33.46
7.72 76.48
2084.79
282.5
382 35.22 74.48 12137.74
4.2
3.04 -27.59 71.2
385.7
21.68
20.9
-3.6 67.3
5712.74
34.33 42.32 23.28 66.71
6443.05
34.11
38.5 12.87 66.58
4729.34
10.33
7.04 -31.85 65.2
699.32
18.46 15.82 -14.3 64.54
763.32
65.1 71.32
9.56 63.39
3751.99
55.14
70.3 27.49 61.85 23864.57
5.67
4.57 19.34 0.19
202.95
106.5
36.4 65.82 0.21
286.94
1.84
0.73 60.33 0.63
66.33
1.41
0.15 89.36 0.79
70.48
3.98
0.5 87.44 0.87
97.95
6.39
5.48 14.24 0.93
176.38
119.8
39 67.45 0.95
595.22
8.38
5.31 36.63 1.38
293.72
32
7.24 77.38 1.41
119.13
17.05
6.08 64.34 1.78
427.64
3.85
2.28 40.78 1.88
145.54
1.95
1.46
25 2.05
85.06
4.13
0.37 91.04
2.1
190.79
4.12
1.78
56.8 2.12
101.32
4.19
2.15 48.69 2.13
146.29
5.85
3 48.72 2.17
71.2
2.01
0.36 82.09 2.18
155.91
4.07
0.52
87.2 2.55
58.4
3.14
3.15 -0.32 2.62
318.29
64
11.2
82.5 2.68
374.43

Table 3: Stock portfolio for our strategy selected in April 2012

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LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT

Name
Lowe's Cos Inc.
Advance Auto Parts Inc.
Gap Inc. (The)
AEP Industries Inc
Tyler Technologies Inc.
Wyndham Worldwide Corp
Myriad Genetics Inc
Home Depot Inc. (The)
Central Garden & Pet Co
Ball Corp
AutoZone Inc
Cintas Corp
Copart Inc
Novellus Systems Inc.
Dillard's Inc.
Health Net Inc.
Aetna Inc.
Safeway Inc
Fair Isaac Corp
Lorillard Inc
Clovis Oncology Inc
Houston American Energy Corp
Amyris Inc
NCI Inc
Fortuna Silver Mines Inc
Sequans Communications SA
First Solar Inc
Diamond Foods Inc
Rambus Inc
Hyperdynamics Corp
Quicksilver Resources Inc
IntraLinks Holdings Inc
Sizmek Inc
Apco Oil and Gas International Inc
Extorre Gold Mines Ltd
Meru Networks Inc
Keurig Green Mountain Inc
Ypf Sociedad Anonima Yacimientos Petroliferos Fiscales
Arch Coal Inc
Swisher Hygiene Inc

11

Start End
Pct
Rank MktCap
29.11 35.96
23.52 97.35 39277.65
89.78 78.62
-12.43 96.1
6608.69
25.36 34.13
34.57 94.73 13507.25
34.44 72.11 109.35 93.1
190.6
39.49 58.16
47.28 92.61
1206.67
43.6 59.92
37.41 92.39
6986.73
25.37 28.28
11.47 92.27
2178.24
47.04 69.43
47.61 90.82 79094.02
10.74
8.96
-16.57 90.5
522.16
41.33
45.5
10.08 89.63
6976.95
382 378.76
-0.85 89.5 14868.77
36.3 42.59
17.33 88.24
5092.37
26.22 33.23
26.74 87.44
3360.53
44.67 40.39
-9.58 87.1
3149.39
58.55 78.49
34.05 86.9
3134.62
36.94 26.93
-27.1 86.79
3052.9
46.58 53.26
14.35 86.5 17208.74
17.88 23.44
31.12 86.35
6551.89
41.51 43.17
4 86.32
1526.82
39.37 37.63
-4.4 85.52
18209.4
18.06 32.84
-81.84 0.18
394.71
1.79
0.18
89.77 0.35
59.53
3.05
2.7
11.33
0.4
138.72
5.16
4.13
19.92 1.13
77.78
3.66
2.86
21.86 1.19
473.55
2.25
1.57
30.22 1.42
77.65
19.25 38.75
-101.3 1.65
1785.56
20.66 14.29
30.83 1.66
455.33
4.47
5.98
-33.63 1.77
540.31
7.6
4.24
44.22 1.87
170.93
3.87
2.7
30.23 1.89
667.53
4.68
5.72
-22.22 2.18
259.31
6.84
4.79
29.89 2.23
250
40.9 10.32
74.77 2.26
1255.41
4.15
4.28
-3.13 2.27
401.74
2.85
6.43 -125.44 2.31
50.02
42.95 53.49
-24.54 2.39
6850.12
13.53 12.47
7.88 2.42
5738.44
90.99 47.84
47.42 2.45
1989.71
22.3
12.8
42.6
2.5
406.84

Table 4: Stock portfolio for our strategy selected in April 2013

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SHORT
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SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT

Name
hhgregg Inc
NetSpend Holdings Inc
GameStop Corp.
Green Plains Inc
Safeway Inc
AmerisourceBergen Corp
Kroger Co. (The)
Tempur Sealy International Inc
Nathan's Famous Inc
Platinum Underwriters Holdings Ltd
XO Group Inc
American Greetings Corp.
VOXX International Corp
Aetna Inc.
Unum Group
Barrett Business Services Inc
Viacom Inc
World Acceptance Corp
American Financial Group Inc
Seaspan Corp
Southcross Energy Partners LP
TRI Pointe Homes Inc
Banro Corp
Golden Minerals Co
ZIOPHARM Oncology Inc
Hycroft Mining Corp
Pernix Therapeutics Holdings Inc
Atlantic Power Corp
IAMGold Corp
Qualys Inc
OraSure Technologies Inc
Global Geophysical Services Inc
Velti PLC
Pretium Resources Inc
Omeros Corp
Walter Energy Inc
Bazaarvoice Inc
Silver Standard Resources Inc
Alexco Resource Corp
Ruckus Wireless Inc

12

Start End
Pct
Rank MktCap
13.28 8.51
-35.92 98.62
447.41
15.97 15.98
0.06 98.52
1104.12
29.43 38.14
29.57 98.31
3868.69
10.74 29.24 172.11 97.95
329.12
23.44 33.48
42.84 97.85
6358.72
54 63.17
16.97 97.14 12857.13
16.43 21.83
32.88 95.83 17326.94
46.95 49.85
6.18 93.32
2746.8
28.48 32.98
15.82 92.5
190.05
55.39 62.1
12.13 92.21
1763.47
11.01 10.69
-2.91 92.05
285.93
18.06 18.99
5.15 91.57
578.69
9.86 12.43
26.06 91.48
218.53
53.26 66.55
24.94 91.4 18303.01
24.92 32.32
29.72 91.3
7125.31
53.31 55.12
3.39 90.29
396.46
62.22 80.06
28.68 89.76 32847.61
91.81 80.46
-12.36 88.47
1124.71
42.73 53.77
25.84 88.46
4201.59
16.08 18.93
17.77 88.12
1287.32
15.37 13.56
11.77 0.43
509.55
18.85 15.73
16.55 0.71
592.78
1.21 0.45
63.02 0.85
228.13
1.57 0.72
54.14 1.19
68.36
1.68 3.51 -108.93 1.36
143.17
10.85 3.46
68.11 1.51
979.9
3.56 5.03
-41.29 2.15
116.72
3.79
2.9
23.63
2.2
549.46
4.8 3.43
28.5
2.3
1833.74
11.4 21.43
-87.98 2.36
372.64
4.41 6.89
-56.24 2.49
249.32
1.95 0.11
94.18 2.55
75.2
1.55 0.02
98.71 2.55
104.34
6.35 5.74
9.61 2.58
564.23
3.91 11.31 -189.26 2.62
101
16.82 7.19
57.24 2.65
1093.49
6.55 7.08
-8.09
2.7
486.35
6.99
9.5
-35.91 2.73
561.2
2.12 1.24
41.56 2.76
125.69
17.01 10.37
39.04 2.81
1262.31

Table 5: Stock portfolio for our strategy selected in April 2014

Trans
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT

Name
Atlas Financial Holdings Inc
Wipro Ltd
Vimicro International Corp
Aspen Insurance Holdings Ltd
Arrow Electronics Inc
Gruma SAB De CV
Macy's Inc
Seagate Technology Plc
L-3 Communications Holdings Inc
Montpelier Re Holdings Ltd
Oracle Corp
Flowserve Corp.
NVIDIA Corp
O'Reilly Automotive Inc
Comtech Telecommunications Corp.
Legg Mason Inc
Yahoo Inc
Graphic Packaging Holding Co
Assurant Inc.
Clearwater Paper Corp
Container Store Group Inc (The)
North Atlantic Drilling Ltd
Controladora Vuela Compania de Aviacion SA de CV
Caesars Acquisition Co
J.G. Wentworth Co (The)
TearLab Corp
Aeropostale Inc.
Fairway Group Holdings Corp
Rocket Fuel Inc
KaloBios Pharmaceuticals Inc
Valhi Inc.
Stemline Therapeutics Inc
RS Legacy Corp
Ambit Biosciences Corp
Westport Innovations Inc
Uranium Energy Corp
LightInTheBox Holding Co Ltd
Education Management Corp
ExOne Co (The)
Textura Corp

13

Start
End
Pct
Rank MktCap
14.7 19.29
31.22 93.48
134.21
12.78 12.43
-2.71 92.08
33329.16
3.45 12.63 266.09 91.77
89.15
42.94 47.35
10.27 90.26
2913.56
59.24 62.09
4.81 88.93
5938.2
32.88 50.07
52.29 88.64
3546.37
54.54 64.87
18.93 88.45
20739.26
50.95 55.96
9.83 88.02
18253.3
112.84 120.94
7.18 87.89
10104.53
29.93 39.52
32.04 84.76
1503.35
39.14 42.65
8.98 84.7 179678.67
77.4 56.85
-26.54 84.54
10841.36
18.1 21.74
20.1 83.28
10542.02
147.96 217.15
46.76 82.97
15513.85
28.99 29.24
0.86 82.88
498.82
44.29 53.09
19.89 81.53
5434.73
36.4 44.65
22.68 79.98
36901.62
9.89 14.09
42.5 79.3
3234.48
63.44 59.95
-5.51 79.18
4737.06
61.13
65.2
6.66 79.08
1289.92
31.5 22.94
27.17 0.31
1514.85
80.29
16.6
79.32 0.61
19098.07
7.38 12.66
-71.54 0.75
737.66
12.85
6.46
49.73 0.84
1804.08
14.8 10.55
28.72 1.21
143.83
5.25
2.31
56 1.29
154.13
4.61
3.36
27.11 1.45
351.67
7.32
6.15
15.98 1.49
325.99
36.34
9.06
75.07 1.54
1174.51
20
4.34
78.32 1.59
76.07
7.64
6.51
14.78
1.6
2736
15.98 16.32
-2.13
1.7
205.35
1.45
0.16
89.28 1.71
141.42
7.2
15.6 -116.67 1.81
124.36
13.52
4.47
66.93 1.82
846.28
1.12
1.86 -66.07 2.02
93.38
5.76
4.95
14.06 2.09
282.28
4.08
0.22
94.63 2.23
521.2
30.68 15.46
49.61 2.24
423.73
20.53
27.9
-35.9 2.49
506.36

Table 6: Stock portfolio for our strategy selected in April 2015

Trans
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
LONG
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT
SHORT

Name
Emulex Corp.
Cigna Corp
Vimicro International Corp
Montpelier Re Holdings Ltd
Global Payments Inc.
Starz
Fortress Investment Group LLC
Lowe's Cos Inc.
Walker & Dunlop Inc
Northrop Grumman Corp
PartnerRe Ltd
AEP Industries Inc
P.A.M. Transportation Services Inc
Verisign Inc
ADT Corp (The)
Allegiant Travel Co
Fairchild Semiconductor International Inc.
Central Pacific Financial Corp.
AXIS Capital Holdings Ltd
Capital Bank Financial Corp
Eagle Bulk Shipping Inc
Urban Edge Properties
Landmark Infrastructure Partners LP
Ohr Pharmaceutical Inc
Weight Watchers International Inc.
Dex Media Inc
Enova International Inc
Akebia Therapeutics Inc
Vertex Energy Inc
Willbros Group Inc.
Sears Hometown and Outlet Stores Inc
Ignite Restaurant Group Inc
Momo Inc
Fifth Street Asset Management Inc
Cellcom Israel Ltd
LendingClub Corp
Rocket Fuel Inc
Grana Y Montero SA Gramon, Lima
Olympic Steel Inc
MagnaChip Semiconductor Corp

14

Start
End
Pct
Rank MktCap
7.98
7.99
0.13 97.97
572.49
130.23 137.12
5.29 96.83 33998.86
12.63 13.43
6.33 96.58
253.13
39.52 42.65
7.93 96.39
1728.18
50.11 76.92
53.5 95.87
6629.19
37.81 25.68 -32.07 95.41
3825.69
7.92
5.28 -33.34 95.32
1753.78
71.5 77.36
8.19 94.4
69648
18.55 22.38 20.65 94.02
592.84
159.72 202.79 26.96 93.37 31860.63
126.42 140.52 11.15 93.28
6191.41
55.56 65.98 18.75 93.2
282.11
61.06 26.41 -56.75 92.93
426.23
66.49 89.66 34.85 91.84
7824.35
39.65 41.76
5.32 89.66
6977.8
166.27 181.75
9.31 87.01
2913.89
19.77 19.99
1.11 86.96
2273.52
22.6 21.69 -4.01 86.48
822.36
51.42 55.83
8.58 86.45
5246.71
28.14 31.19 10.84 85.73
1344.03
8.49
0.7 91.76 0.61
157.52
22.68 25.52 -12.51 1.05
2474.02
16.15 15.11
6.47 1.39
138.12
2.71
3.55
-31 1.49
66.95
7.6 15.04 -97.89 1.63
437.23
3.8
0.2 94.74 1.75
65.68
19.94
6.15 69.16 1.83
615.12
8.5
9.69
-14 1.88
169.28
2.58
1.58 38.76 1.97
69.43
2.63
2.31 12.17 2.62
137.3
7.2
6.38 11.39 2.88
165.52
3.61
3.14 13.02 3.03
94.26
10.99 16.63 -51.32 3.11
2062.55
9.78
3.4 65.24 3.22
534.98
4.97
7.57 -52.31 3.35
509.96
19.39
7.53 61.17 3.74
7139.15
9.06
2.98 67.11 3.92
369.63
7.46
6.49 13.02 3.96
1040.25
11.3 19.23 -70.2 4.01
124.78
5.75
5.13 10.78 4.06
190.71

Table 7: Backtest result of our strategy with the reduced number of stocks in the portfolio
Total
Return

Annual
Return

Max
DD

Sharpe

Sortino

StdDev

Correl
Bench

RSquared

Beta

Alpha

Strategy 422.99%

39.20%

-20.16%

1.92

2.91

19.50%

-0.17

0.03

-0.25

47.76%

S&P 500

9.33%

-19.62%

0.69

0.96

13.56%

N/A

N/A

N/A

N/A

56.26%

Rank Dt
5 2015-04-18
4 2014-04-19
3 2013-04-20
2 2012-04-21
1 2011-04-23

#Lng #Shrt New Pos Sold Pos Turn Ret%

Excess% Costs Cash
StdDev
10
10
18
18
90 19.6305
19.8838 2.2385 377.2759 45.2048
10
10
20
20 100 68.2582
56.557 1.9344 223.6885 57.7355
10
10
20
20 100 31.7707
11.8035 1.4724 169.7505 53.8622
10
10
20
20 100 32.6914
19.8719 0.967 128.2053 48.2681
10
10
20
0
0 61.3422
58.2467
0.35
79.72 31.7788

Figure 9: Return, turnover, number of positions, maximum return, and leverage of the
portfolio

4-3. Rolling Analysis

Since many systematic strategies are highly sensistive to initial conditions at the time of market
implementation, it is helpful for strategy developers to execute their strategy in a rolling backtest so
as to eliminate the starting-point bias. For the same purpose, Monte Carlo backtests may be also
used, where a large number of backtests are executed with randomized starting points in the data,
and then results are averaged.
15

In order to assess the profitability of our strategy, we execute a rolling backtest with a oneweek frequency. The transaction costs are unchaged from the previous test (i.e., 0.35% slippage and
2% carry cost for short positions). The time period for each backtest is 1-year, hence there is no
rebalancing taking place. We start the rolling backtest on April 23rd, 2011 and stop it on April 23rd,
2016. Figure 10 shows the result of this rolling backtest. The average 1-year simple return was
21.31% (which exceeds S&P 500 by 8.86%) with the standard deviation of 54.58%.
Figure 10: 1-year simple returns of our strategy in a rolling backtest

Figure 11 classifies the result of our rolling backtest by starting month. It is observed that our
strategy consistently performed better by starting in April than in other months. This becomes more
apparent when we lower the frequency to one month and increase the time period to four years
(Figure 12).
Figure 11: Returns of our strategy in the rolling backtest by starting month

16

Figure 11: Rolling backtest with 1-month frequency in 4-year time period

It is interesting that April also happens to be the month in which S&P 500's historical return is the
highest for the years 19992015 (Figure 12) [11]. US sector ETFs, such as Energy Select Sector
SPDR (XLE), Financial Select Sector SPDR (XLF), and Utilities Select Sector SPDR (XLU) also
exhibit higher returns in April.
Figure 12: Average S&P 500 (SPY) returns by month

Image source: CXO Advisory Group [11]

Although it is unknown as to exactly what makes the return of US stocks higher in April than in
other months, this seasonal pattern provides evidence to the famous sell in may and go away
market adage, which is proven to be profitable in an out-of-sample analysis by Andrade et at. [12].
It also reflects another failure of the EMH.

17

5.

Conclusion

A large part of today's US equity inflows is attributed to stock buybacks i.e., companies
repurchasing their own shares. They buy back more of their own shares as the market rises and
fewer as it falls, as they have more capital for buybacks during the upturns than during the
downturns. This particular characteristic of stock buybacks provides investment opportunities for
trend following.
In this paper, we proposed a low-frequency systematic equity strategy combining the
NASDAQ US Buyback Achievers Index (DRB) and a historically proven trend-following strategy.
Despite its simplicity, a 5-year backtest result of our long/short strategy in the US equities market
from April 2011 to April 2016 shows a 267% total return in the period, with the Sharpe ratio of 2.0,
the Sortino ratio of 2.75, and the maximum drawdown of -16.25%.
Since our strategy is long/short, we believe that it should be still highly profitable when the
market enters a bearish trend and companies cease to buy back their own shares.

References
[1]

A.G. Haldane, "The age of asset management", Bank of England, 2014.

[2]

Pensions and Lifetime Saving Association, "Systematic Investing Made Simple", 2016.

[3]

NASDAQ OMX, "NASDAQ US Buyback Achievers Index Methodology", 2014.

[4]

Y. Lemprire, C. Deremble, P. Seager, M. Potters, and J. P. Bouchaud, "Two centuries of

trend following", Capital Fund Management, 2014

[5]

Credit Suisse, "Capital Allocation: Evidence, Analytical Methods, and Assessment

Guidance", 2015.

[6]

Bloomberg, "There's Only One Buyer Keeping S&P 500's Bull Market Alive", 2016.

[7]

Zero Hedge, "Buyback Blackout Period Starts Monday: Is This The Catalyst That Ends The
S&P Rally?", 2016.

[8]

Wikipedia, "Trend following".

[9]

Portfolio123. http://www.portfolio123.com

[10]

S&P COMPUSTAT. http://www.compustat.com

[11]

CXO Advisory Group, "Sector Performance by Calendar Month", 2016.

[12]

S.C. Andrade, V. Chhaochharia and M.E. Fuerst, "'Sell in May and Go Away' Just Won't Go
Away", University of Miami, 2012.

[13]

G. Soros, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It
Means", Public Affairs, 2008.

[14]

EconomPic, "Stock Buybacks Demystified," 2016.

18