Many investors are familiar with Grinold and Kahn’s “Fundamental Law of Active Management,” which appears in their 1995 classic Active Portfolio Management. The formula looks like this:

Where IR is the information ratio, a measure of risk adjusted return, IC is the correlation between forecasts and actual returns and BR is the strategy’s breadth, the number of independent bets per year.

Based on the expression above, we think it is clear that one can maximize risk adjusted return by making a lot of bets (play often) and make sure that forecasts are highly correlated with actual outcomes (play well).

Initially our strategy was based on the output of a fundamental model with a six-month forecast horizon. There is a new forecast each day, but consecutive forecasts are highly correlated and thus not independent. In short, the strategy’s breadth was limited.

That’s why we introduced several new models with varied inputs and a range of forecast horizons. Though our models are not perfectly independent, our current ensemble strategy has considerably more breadth than our initial strategy.

So what does this say about future research? Recognizing that the S&P 500 is a well-fished pond, we are starting to look at other asset classes like bonds, currencies and commodities. At this point there is nothing to report, but we expect that something of value will come from the research.

Finally, we think it is a good idea to say, and say again, that strategies that “play often” are not efficient tax-wise. As a result, our strategy is best suited for tax deferred accounts.

©2016 Hull Tactical Asset Allocation, LLC (“HTAA”) is a Registered Investment Adviser. The information set forth in HTAA’s market commentaries and writings are of a general nature and are provided solely for the use of HTAA, its clients and prospective clients. This information does not constitute investment advice, which can be provided only after the delivery of HTAA’s Form ADV and once a properly executed investment advisory agreement has been entered into by the client and HTAA. These materials reflect the opinion of HTAA on the date of production and are subject to change at any time without notice. Due to various factors, including changing market conditions or tax laws, the content may no longer be reflective of current opinions or positions. Past performance does not guarantee future results. All investments are subject to risks. HTAA and any third parties listed or identified herein, including Grinold and Kahn, are separate and unaffiliated, are not responsible for each other’s products, policies or services, and the views expressed are their own.