Gayed-Bilello Gearing Strategy: 17% CAGR — Does It Beat SPY?

Welcome back to Avalon QuantBrief, where we break down the industry's most powerful tactical asset allocation frameworks. Today, we are exploring the famous Gayed-Bilello Gearing Strategy, a classic model designed to leverage up during bull runs and hide in cash during market crashes. By adapting its core mechanics for today's volatile landscape, we show how quantitative rules can turn high-beta leverage into a controlled, high-performing system.

Backtest Summary (2017–present)

📈 CAGR: 17.4%
📉 Max Drawdown: -31.0%
⚡ Sharpe Ratio: 0.91
💰 Total Return: 393.9%
🎯 Universe: TQQQ, UPRO, SPXL, TNA, SOXL, TLT, GLD, SHY

The Original Gearing Mechanics

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The classic Gayed-Bilello strategy utilizes a dual-regime filter, classifying the market as bullish only when the SPY is above its 200-day simple moving average and the VIX is at or below 28. If either condition fails, the system triggers a defensive bear regime on the final trading day of the month. This signal rotates capital out of high-beta geared ETFs like TQQQ, UPRO, and SOXL, safely parking it in defensive havens like TLT, GLD, or SHY.

Optimizing for Modern Markets

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To survive today's faster market cycles, our adapted version introduces three critical enhancements to the original model. First, a VIX spike above 28 triggers an immediate, mid-month de-risking to SHY, while an EMA distance ranking replaces the standard rate-of-change metric to prevent whipsaws. Finally, we implement dynamic concentration, holding the top two geared ETFs during calm regimes but concentrating into the single strongest asset during rapid recovery phases.

The Performance Metrics

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Backtesting this adapted strategy from 2017 to the present reveals highly impressive institutional-grade results. The system generated a compound annual growth rate of 17.4%, yielding a total return of 393.9% with a solid Sharpe ratio of 0.91. Most importantly, while trading triple-leveraged ETFs typically exposes investors to catastrophic 70% drops, our strict risk-mitigation rules successfully capped the maximum drawdown to just minus 31.0%.

Analyzing the Equity Curve

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The equity curve highlights the precise impact of our structural modifications during major market shifts. During the low-volatility bull runs of 2017 and 2021, our dynamic concentration rule maximized alpha by riding the strongest geared ETFs. Conversely, during the 2020 pandemic crash and the 2022 bear market, the double-layered VIX filter and EMA ranking quickly rotated the portfolio into defensive assets, flattening the drawdown curve.

The Quant Verdict

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Ultimately, this tactical gearing system proves that you do not have to fear leverage if you manage the downside systematically. By combining leveraged ETFs with sophisticated, volatility-scaled regime filters, our adapted model delivers exceptional risk-adjusted returns. To see how this strategy is traded in a live portfolio, subscribe to Avalon QuantBrief to receive our real-time signals and execution logs.

⚠️ Not financial advice. This is for educational purposes only. Always do your own research before investing.

📄 Original paper: Leverage for the Long Run: A Systematic Approach to Managing Risk and Enhancing Return

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