[Teahouse Strategy] Beta+: a momentum trading strategy on Arbitrum

Introduction

Due to recent changes in market conditions (e.g. an increase in volatility) and in order to expand our offerings, Teahouse will be launching this Beta+ strategy to:

1. Diversify our platform’s offerings with different strategies that can do well under a variety of market conditions. (For example, Beta+ can be an alternative to our LP strategies recently affected by the impermanent/divergence loss in a volatile market.)
2. Take advantage of the growing DeFi market and ecosystem on Arbitrum while building up more experience with launching our strategy vaults on different Layer 2s.

TL;DR

• Teahouse will be launching Beta+, a momentum trading strategy on Arbitrum.
• The Beta+ strategy aims to capitalize on both strong uptrend and downtrend of the market.
• The strategy uses GMX to open leveraged long/short positions on ETH and/or BTC, while utilizing 1inch for spot trading, and AAVE for excess funds to accrue interests.
• Back-testing using data from the past 7 years shows an average gain of 15% annually.
• Live-testing results: 3.3% total gain over the last 28 days. (converted APR = 43%)

Concepts behind the Beta+ strategy

Before diving into the Beta+ strategy, it is important to understand what “Beta” means and what “momentum trading” is.

“Beta” is a measure of an asset’s volatility in relation to the market. A “Beta” of 1 indicates that the asset is just as volatile as the market. The Beta+ strategy aims at being a improved alternative to purely “Beta investing” (buying and holding the crypto market) by providing a possibility at making money on both bull and bear markets, and at the same time keeping the risk level approximately constant and at a lower level than typical crypto assets. (It is more adaptive than Beta investing, therefore, “Beta+”.)

The Beta+ strategy achieves its goal by implementing a momentum strategy. “Momentum trading” involves taking advantage of trends in financial markets by buying or selling assets that have demonstrated strong price movements in recent times, with the belief that these trends will continue in the near future. Momentum trading strategies are based on the idea that markets tend to move in trends, and these trends can persist for an extended period of time.

Teahouse’s Beta+ strategy is a systematic trading strategy that capitalizes on strong directional crypto asset movements on the order of a few months. The strategy is designed to perform equally well in bull or bear markets by going long or short ETH and/or BTC. The core algorithm is based on extensive academic research into price momentum strategies. The algorithm measures momentum utilizing moving averages of trailing prices built in order to provide a convex payoff and reduce turnover. The risk control algorithm utilizes risk-parity to achieve an approximately constant volatility target of 10% annually.

Beta+ will execute spot trades on 1inch and open long/short positions with leverage on GMX. Any excess assets will accrue interest in AAVE by supplying liquidity.

This type of strategy does well in markets that follow a strong trend in either direction.

Performance

Back-testing

The simulated back-testing performance using data from January 2016 to April 2023 shows an annual return of 15% with a standard deviation of 10.5%. Furthermore, the simulation shows that an investor can have a 1% chance of losing on average -2.3% in a given day.

It is important to note that back-tested results are not real returns and can only serve as an approximate view of the risk/return profile of a given strategy.

Live-testing

Teahouse performed live testing during the March 29, 2023 to April 23, 2023 period. During this time, the Beta+ strategy generated a return of 3.3%.

Conclusion

Teahouse is excited to launch the Beta+ strategy on our platform since it complements our existing LP strategies and captures yield on trending markets. (In contrast, LP strategies generally perform better during a range-bound market.) By launching on the Arbitrum network, our development team also gains valuable experience in streamlining our strategy vault infrastructure across multiple Layer 2 EVM chains as we continue towards our long-term goal of building a more user-friendly strategy layer in the DeFi ecosystem.

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