Pairs Trading (Hedge Ratio)
Mean reversion · Market neutral · Equity ETFs · Daily
The rules, in plain English
This pairs version trades the Australia and Canada ETFs, using a rolling regression hedge ratio to decide how much of one to hold against the other. The hedge ratio matters because the two do not move dollar-for-dollar. When their spread stretches, it trades against the stretch and waits for it to normalise.
The published backtest
| Total return | +12.4% |
|---|---|
| CAGR (annual growth rate) | +0.45% |
| Sharpe ratio | -0.30 |
| Maximum drawdown (worst peak-to-trough fall) | -14.3% |
| Win rate | 50.2% |
| Profit factor | 1.06 |
| Risk grade (our shorthand, from the published figures) | F |
| Asset class | Equity ETFs |
| Style | Mean reversion · Market neutral |
| Timeframe | Daily |
| Type | Weights |
— means no figure was published for this strategy. Ungraded and workflow entries publish diagnostics rather than a graded portfolio backtest, so some metrics are not published for them.
Honest verdict
Made money, but cash did better risk-adjusted (negative Sharpe)
This one finished ahead in raw dollars, but its Sharpe ratio was negative — meaning that, after adjusting for the ups and downs taken along the way, cash would have been the better risk-adjusted choice in the published test.
Worst drawdown in the published test: -14.3% — at its lowest point, a follower of this test would have been down that much from the peak before any recovery.
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Attribution: strategy and published backtest results from the QuantJourney open-source library (Apache-2.0), via quants.md — published backtest results by QuantJourney, reproduced with attribution. Results are hypothetical backtest results based on historical data; they are not live trading results and do not guarantee future performance. Educational content only — not financial advice, and not a recommendation to buy, sell, or hold any security.