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Alternative Market Briefing

ProfitScore's own approach to investing in long-dated US Treasury futures

Wednesday, September 02, 2020

John McClure
B. G., Opalesque Geneva:

Today's equity valuations have rarely been higher, and fixed income yields are at historic lows. There's a fixed income manager based in Idaho called ProfitScore that has a solution for that: measure flight-to-quality movements into US Treasuries.

"The challenge with allocating to alternative investment strategies is that small edges that worked in the past don't always work in the future," says founder John McClure. "The risk profile can change considerably when equity markets turn down and volatilities spike. Is the edge based on something fundamental to the market? Will the future resemble the past when markets are under stress?"

ProfitScore is a data-driven investment firm that specializes in producing alpha by managing the systematic risk (beta) in highly liquid investment instruments. To accomplish this, the managers engineer portfolios that exploit predictable tendencies in investor behaviour. Analytical observations and tested assumptions are converted into full-scale investment models, which are rigorously tested in all market environments. The managers employ multiple investment models that represent a fundamental edge that they have uncovered in their research.

Fundamental edge

The fundamental edge is found in the relationship between the Federal Reserve and US unemployment levels. In 1978, the Fed added maximum employment to its mandate. Hence it had to become accommodative when the US economy softens and the risk of unemployment increases. To stimulate the economy, the Fed is motivated to lower interest rates and purchase financial assets. In 2008 and 2020, it became the lender of last resort. This accommodation, McClure explains, has created a structural relationship in US Treasuries, making them the preferred flight-to-quality asset in the world. In times of stress, US Treasuries generally get a bid. As long as maximum employment is part of the Fed's mandate, there is little chance this relationship will change in the future. If anything, this relationship has only gotten stronger over time.

"One of the most consistently reliable edges we have at ProfitScore is our ability to measure flight-to-quality movements into US Treasuries," he continues. "We call it the Fear trade. Historically, 90% of all gains in longer-dated US Treasury bonds happen during flight-to-quality periods causing the US Treasury market to function as two separate markets. In times of fear, herd mentality takes hold, pushing asset flows into US Treasuries. When fear is not present, US Treasuries are bought and sold for a variety of reasons and must be traded using additional information. The value added by ProfitScore is our ability to know when and how to trade each market environment."

John McClure will present in the upcoming Fixed Income Alternatives Strategies webinar on 9th September at 10 am EST.

US 10 Year Treasury Note
US Treasury yields ticked higher on Tuesday after data showed the country's manufacturing activity accelerated to a nearly two-year high in August.

yields +0.680% on Wednesday Sept. 2, 2020, 4 am EDT

US Treasury Plus Program

ProfitScore's Long/Short US Treasury Plus Program is a short-term systematic strategy that trades longer-dated US Treasury futures 10-plus years in duration by positioning assets to benefit from a rising or falling yield curve. Unlike most defensive strategies, which make money in times of crisis but cost the portfolio money in non-crisis periods, the Program's return profile is more consistent over time.

Its portfolio capitalizes and further enhances the native ability of longer-dated US Treasuries futures to offset risk assets during times of crisis. Its short-term systematic return profile is not tied to the overall direction of US Treasury interest rates/yields. Its core edge is driven by a strong structural relationship that exists because of mandated policies at the Federal Reserve.

The Program is up 12.7% YTD (to end-July) and has annualised 15% since its November 2011 inception, compared to 1.4% for the SocGen CTA Index, according to documentation reviewed by Opalesque.


ProfitScore Capital Management, Inc. is a data-driven, quantitative investment manager located in Eagle, Idaho, and founded in 1998. It manages $204.5m, $98m of which in the US Treasury Program, as of May 2020.

ProfitScore's focus has been developing and implementing quantitative-based investment strategies. The firm engineers high alpha producing investment programs that systematically exploit predictable tendencies in market behaviour. Analytical observations are embedded into investment modules designed to trade liquid, transparent markets in all environments. All the frameworks include a proprietary approach to minimise "data mining bias".

ProfitScore is a "data science" organisation, turning data into information, and expressing that information through financial instruments to make money for investors, the managers say. "We were founded based on learning the value of analysing multiple sources of unrelated data streams in achieving an individual's credit or FICO score. We have applied this mathematical theory to generating profits for our investors, hence the name ProfitScore."

Upcoming webinar:

Fixed Income Alternatives Strategies
Time: Wednesday, September 9th, 2020, at 10 am EST
Details and free registration here:

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