Beta+ Long Portfolio Strategy

Introduction

Teahouse's Beta+ Long Portfolio Strategy is designed for users seeking a more aggressive approach to capitalize on a bullish market.

The Beta+ Long Portfolio Strategy is a modification of the Beta+ Momentum Strategy (“Beta+ Strategy”) but excludes the short position. Its design encompasses multiple algorithms, tokens, and DeFi protocols.

The Beta+ Long Portfolio Strategy is currently running on the Arbitrum and Mantle networks.

Strategy Design

The core design of the Beta+ Long Portfolio Strategy remains rooted in the Beta+ Momentum Strategy (“Beta+ Strategy”).

First, here is a brief overview of the Beta+ Strategy:

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 Beta+ Long Portfolio Strategy:

• Buys and holds $BTC and $ETH.

• Holds only long or flat positions (no short positions). The portfolio can alternate between 20% — 100% long positions depending on market conditions.

• Does not leverage.

• Adapts the Beta+ Strategy algorithm to adjust the exposure level of the long position while controlling risk.

• Holds LP positions in the stETH/wETH pair, for at least 20% of the portfolio, which is always long.

• Optionally invests $USDC positions in the USDC.e/USDC LP position or AAVE (or other interest-earning products).

Strategy performance for the Beta+ Long Portfolio Strategy is calculated in $USDC.

Simulation & Performance

Given the intricacies of the Beta+ Long Portfolio Strategy (“Beta+ Long”), the Teahouse Strategy Team was extremely thorough in simulating the strategy’s performance, especially in terms of the long positioning. Various percentages of long exposure were simulated to find the optimal level.

Please note: We examine $BTC prices in our simulation as $BTC and $WBTC exhibit a near-identical trend. However, $WBTC is the token deployed in our strategy.

Simulation Settings

• A transaction cost of 5 basis points per trade (round trip = 10 bp). This value is based on our experience with the Beta+ Strategy. However, given its low turnover, the strategy is largely insensitive to transaction costs.

• AUM = $200,000: $100,000 is invested into $ETH, and $100,000 is invested into $BTC.

• An assumption of zero interest rates; this means that the $USDC positions do not earn any interest.

• At least 20% of the AUM is consistently invested in a long position (buy-and-hold). The position dynamically shifts from 20% to 100% based on a timing algorithm.

• Simulation period: 2016 to 2024.

Simulation Performance

To evaluate the simulation results for long positioning, we examine:

• The AUM and payoff

• The profit and loss under each level of long exposure

In the 100% long portfolio (Long only), equivalent values of $ETH and $BTC are simulated to have been bought (since 2016).

AUM & Payoff

AUM

The following figure shows that the allocation of Beta+ Long changes dynamically between 20% of AUM to 100% (in this example, $40,000 to $200,000).

Figure 1. AUM Changes Over Time (Simulation: 2020–2024)

Payoff

Figure 2. shows the expected payoff of Beta+Long over approximately three months.

The diagonal red line in the graph shows the returns of an investor who only invests in a buy-and-hold portfolio instead of Beta+ Long. The blue line represents the overall trend of Beta+ Long’s simulation results. Notice that Beta+ Long mitigates much of the losses with little change to the upside.

Figure 2. Expected Beta+ Long Payoff (over a 3-month period)

Profit & Loss

In this section, we compare the simulation performances of Beta+ Long and the Long-only strategies.

Note: The following tables and figures include trading costs but do not account for any fees.

Basic stats

The table below shows the annualized average return, standard deviation, and Sharpe ratio (SR = ave/std). As the proportion of the long position increases, the Sharpe ratio decreases, mostly driven by the increase in volatility. The volatility increases due to the longer time spent in market participation as Beta+ Long transitions to the Long-only position.

Graphs

The following graphs show different simulation timeframes and performance of the three strategies — Beta+ Strategy, Beta+ Long, and Long-only, respectively, the red, green, and blue lines.

Note: The volatility of the Beta+ Strategy is re-scaled to 70% for illustration and comparison purposes.

Figure 3. Simulation Performances (2016–2024)

In the simulations covering the bear markets of 2018 and 2022, Beta+ Long exhibited the capability to capture most of the upside, providing some protection during prolonged downturns. This is illustrated in the following two figures.

In Figure 4., the simulation shows that Beta+ Long provided partial protection during the 2018 bear market, ultimately resulting in a flat performance after a two-year period.

Figure 4. Simulation Performances in the 2018 bear market (2018–2024)

As for the simulation performance during the 2022 bear market, Beta+ Long demonstrated protection by primarily avoiding most of the drawdowns during the bear market, as illustrated in Figure 5.

Figure 5. Simulation Performances in the 2022 bear market 2021–2024)

Pre-launch Test

Teahouse’s Strategy Team tested the strategy a few weeks before launch on Arbitrum, starting from February 8, 2024 to March 6, 2024, using an initial amount of $1,000 USDC. During this timeframe, the price of $ETH increased from $2,396 to $3,672, and $BTC soared to $65,267 from $43,208, both showing over a 50% price increase. Consequently, the pre-launch test results of Beta+ Long demonstrated a return of 45.4% during this period, translating into a substantial APR of 605%.

As Beta+ Long capitalizes on upward trends, the results confirm that the strategy is well-suited for bull markets. A positive growth trajectory of either $ETH or $BTC bodes well for its potential performance in live market conditions.

Conclusion

The Beta+ Long Portfolio Strategy aims to provide custom-level protection in a bull market. Working from the fundamentals of the Beta+ Momentum Strategy, the Beta+ Long Portfolio Strategy is a product that dynamically adjusts the long exposure without shorting.

Simulation results indicate that negative trends lasting over three months are mostly effectively hedged (see Payoff section) without compromising long-term performance (see Profit & Loss section). Additionally, our pre-launch test results affirm the strategy’s suitability for a bull market, boasting an APR of 605% after 1 month.

The Beta+ Long Portfolio Strategy underscores Teahouse’s commitment to innovation and adaptability in the dynamic DeFi landscape. As we pilot-test this strategy with our new TeaVault v3 Portfolio smart contract, Teahouse remains dedicated to providing our community with cutting-edge solutions suitable for the current market conditions.