Does anyone here do the Jason Kelly investment strategy?

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9Sig: The Risk We Chose
I wrote last Sunday about hybrid asset allocation as a potential way to reduce 9Sig’s drawdown in an extended bear market.

This prompted a renewed wave of research into the plan by subscribers and others, who hit upon what they thought was a gotcha: 9Sig would have been devastated by the dot-com crash. The deep, extended descent of the Nasdaq 100 (NDX) would have ground TQQQ down so severely that 9Sig’s recovery would have taken many years.

News to newcomers: this was a known risk at 9Sig’s inception.

We studied 9Sig’s vulnerability to a dot-com-like collapse before launch and flagged it in the January 2017 announcement as a cost of pursuing extraordinary returns.

I made a calculated choice to run a plan built for the much more common market environment featuring sharp setbacks and recoveries, not two-and-a-half-year collapses of more than 80% in the underlying index, caused by a euphoric bubble in zero-profit companies measuring performance in clicks and eyeballs.

This was not the same as claiming that no such event could ever happen again. It was a decision to stop fighting the last war and run a high-performance plan designed for the prevailing climate, not freak storms.

It has worked: 9Sig has compounded at 38.5% a year for more than 9½ years. The criticism, however, has merely changed form. First, the plan would never work. Then, its gains were luck. Now, the answer to every added year of live results is “so far” as the plan’s critics await a collapse. The standard keeps moving as the record grows.

With 9Sig nearing its tenth anniversary, this is a good time to revisit whether its known weakness can be reduced without dulling the engine that produced its returns.

Nothing in the current 9Sig plan is changing. This is a ten-year stress test, not a warning that I see a crash coming.

The HAA strategy I covered last Sunday and other systematic plans don’t come close to matching 9Sig’s compound annual growth rate. To investors who want to reduce drawdown and increase smoothness, 9Sig’s dot-com vulnerability can outweigh its extraordinary return. For many critics, the working assumption is that 9Sig will eventually meet disaster.

This may not be the case. We may go the rest of our lives without another dot-com collapse, as seemed most probable when we made our calculated choice nearly a decade ago. We’ve already gone a third of an investor’s lifetime with the top-performing approach this side of an overfit backtest. Maybe we’ll go another two decades of surprising everyone who keeps saying our performance is not sustainable.

So, the objection that 9Sig would have been devastated by dot-com doesn’t uncover a new risk; it identifies the bargain we made. We knew that, flagged such a collapse as an outlier, and made a plan that has excelled in the much more common market pattern.

But the black swan still swims and every finger-wagger can always say “so far” and “just you wait.” What if we could account for more of that risk without giving up what has worked?

I’ve got news for the permacritics: every added defense lowers exposure to profit potential. Every mainstream investment manager is taught to diversify as a way to reduce risk, then dutifully does so across every asset class—and almost always loses to SPY in the end.

Many highly ranked rules-based plans focus on maximum drawdown, Sharpe ratio, smoothness, and such. Those are useful measurements, particularly for risk-averse investors, but don’t define superiority. A strategy with substantially lower return usually looks better by those measures because it carries less equity or leverage exposure.

Back at the bench, my goal is not to make 9Sig crashproof, but to see if I can retain its essential return engine while preparing for tail risk.

The danger in this work is that as protection against an extremely rare event ramps up, overall performance ramps down. You know how to guarantee you won’t suffer in another dot-com crash? Stay out of the stock market.

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