The Holy Grail

For all those who believe there is no holy grail, in global markets there is one, it’s beating the S&P500. You beat it, you prove it, and you have challenged the holy grail. It’s the most popular benchmark, with the most history, with the most assets under management. There are more than 10 ETFs based on various slices of S&P500. The most popular SPY has more than 150 billion under management. Aggregate the figure linked with S&P 500 and related Indices could be around 300 billion USD. With such an attention, S&P500 takes the top spot for assets.
It took us a while before we reallocated and mirrored the S&P 500. We call our version the US SANDP Extreme Reversion. Over the last 12 months we have done a similar exercise for STOXX50, Sensex 30, Nifty 50, Nikkei 225, FTSE100 etc. The exercise on S&P 500 was the most satisfying.
So what did we do? We took our Jiseki ranking methodology (patent filed) and reallocated the 500 components over a rebalancing period of 365 days. We set max allocation limits and tested the RMI model.
What did the RMI deliver? RMI delivered an annual 12% annualized compared to 5% for the S&P 500. Both models (S&P 500 is a model) had a similar volatility. As of end of November RMI SANDP was ahead of S&P 500 for the year. A 7% relative outperformance might seem insane, as this just opens up an arbitrage opportunity worth billions between the RMI and S&P500, which in-turn would mean volume for RMI.
Indexing is not a closed box. Search for alpha is a human quest. And interdisciplinary systems looking at universal laws which work across different research streams like fundamentals, behavioral, technical, statistical can look at markets and natural systems from a different and new perspective. The fact that they challenge the holy grail of today is just coincidental.