This Mean Reversion strategy using SPY and TLT, has quietly gained adoption among professional investors by exploiting predictable wealth manager rebalancing behavior.
When we first heard about this strategy we decided to backtest it ourselves.
From 2013-2015, the strategy delivered approximately 11.2% annualized returns and maximum drawdown of only -19.56%, underperforming SPY’s raw returns by roughly 1% annually while exhibiting significantly superior risk-adjusted performance.
Wealth managers running target-allocation portfolios (such as 60/40 stock-bond funds) must periodically rebalance to maintain their mandated asset mixes. At month-end, they systematically purchase whichever asset class has underperformed, creating temporary price pressure disconnected from fundamental value. These flows are large, predictable, and price-insensitive.
Implementation Rules
Phase 1: Identify the Underperformer (Days 1-15)
Monitor the relative performance of SPY versus