My Hedged Fund - Another "Trend-Following" Post

This is a discussion on My Hedged Fund - Another "Trend-Following" Post within the Trading Journals forums, part of the Reception category; Originally Posted by anley Calm down Adam I was only speaking hypothetically. The point being that many traders don't need ...

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Old Jan 5, 2011, 9:25pm   #25
Joined Sep 2008
Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by anley View Post
Calm down Adam I was only speaking hypothetically. The point being that many traders don't need a lot of infrastructure and expense to make good returns. After all, there were plenty of successful investors and traders before computers.

As for working in Swindon versus Mayfair, don't ever think that a flashy address versus a non flashy one means an extra 1000+ basis points per year. If anything the Mayfair office is an important part of the hedge fund scam.
Sorry I was trying to be humorous and obviously missed the mark.

I agree that many (successful) traders don't need a lot of infrastructure for the size they are trading. But you specifically said $1bn of capital and I assure you this is a whole different ball game that does require significant investment to mitigate the risks (operational risk, not market risk).

Mayfair vs Swindon....well it's not going to earn you 1000 bp a year, but who said running an investment firm was all about returns? Sure, returns do have some correlation to profitability, but the management fee is the basic method of income for these companies and that is all about attracting investment into your fund (the Mayfair address will certainly help here)
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Old Jan 6, 2011, 8:28am   #26
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Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by adamscj View Post
Mayfair vs Swindon....well it's not going to earn you 1000 bp a year, but who said running an investment firm was all about returns? Sure, returns do have some correlation to profitability, but the management fee is the basic method of income for these companies and that is all about attracting investment into your fund (the Mayfair address will certainly help here)
Good point, now we're talking on the same wavelength. Returns, but for who
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Old Jan 6, 2011, 2:29pm   #27
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Re: My Hedged Fund - Another "Trend-Following" Post

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meanreversion - two 30% drawdowns in a year sounds quite hefty - what kind of annualized vol are you running at?
I've gone back and built in the following metric to my software (Amibroker).

Take the standard deviation of all daily returns, as expressed in percentage, and multiply the resulting number by sqrt 252.

I then backtested with stake size of 0.5% per trade, 0.75% and 1.0% (I trade 0.75%).

The volatility of returns is fairly constant for each stake level, whether going back 5 or 15 years. For 0.5%, I get a vol of 20%, for 0.75% a vol of 30% and for 1.0% a vol of 40% (approximately).

I also look at CAGR/max drawdown, which tends to be high for 0.75% or 1.0%. So in answer to your question, my backtested vol is around 30% (roughly twice the stockmarket). I can't bring myself to go and dig up all my old closing equity balances, maybe that's something I'll monitor going forward.
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Old Jan 7, 2011, 4:55pm   #28
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Re: My Hedged Fund - Another "Trend-Following" Post

C'mon Boston, we need a daily input from you to keep this thread from being lost forever .. ?!??!
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Old Jan 7, 2011, 7:02pm   #29
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Re: My Hedged Fund - Another "Trend-Following" Post

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C'mon Boston, we need a daily input from you to keep this thread from being lost forever .. ?!??!
This thread is already better than 99.9% of threads on T2W after 4 pages, i'm reading too..........
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Old Jan 8, 2011, 12:06am   #30
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Re: My Hedged Fund - Another "Trend-Following" Post

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I also look at CAGR/max drawdown, which tends to be high for 0.75% or 1.0%. So in answer to your question, my backtested vol is around 30% (roughly twice the stockmarket). I can't bring myself to go and dig up all my old closing equity balances, maybe that's something I'll monitor going forward.
Ok makes sense...if you're running at around 30% vol then the drawdowns you mentioned seem consistent with a medium term TF strat. I guess if you're running with your own account then you will naturally want to run slightly "hotter" than your average CTA which might target something in the 15-20% range for clients
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Old Jan 8, 2011, 1:24am   #31
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Re: My Hedged Fund - Another "Trend-Following" Post

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Ok makes sense...if you're running at around 30% vol then the drawdowns you mentioned seem consistent with a medium term TF strat. I guess if you're running with your own account then you will naturally want to run slightly "hotter" than your average CTA which might target something in the 15-20% range for clients
Week 1 - The fundamental challenge of dealing with “The Fundamentals”

So I wake up early on Wednesday (January 5th) and log in, as it is my custom, to Morningstar, my favorite source for market information (I find Morningstar to be the most customer-friendly website out there, with plenty of ETF / Stock tools (some at a cost), but more on the topic of great websites at some point in the future.) What do I find? Well, the news that ADP (an US-based payroll company whose numbers, while not official, are seen as a proxy for the official US Labor Department employment numbers) reports that the US economy added almost 300,000 jobs in the month of December alone!

“Wow!” I of course think, this is likely to be a banner rest of week in the Market. Higher employment is of course expected to create (fundamentally speaking) higher demand for goods and services, driving improvement in revenue and bottom line performance for companies, which promotes hiring… and you get the idea. This is of course an ultra simplistic view of market theory, but an interesting one in my opinion as it highlights the challenge of relying on “Fundamentals” to make trading decisions.

So what happened after the news? SPY goes from 126.98 at the close on Tuesday (January 4th) to 127.64 at the close on Wednesday, a nice (but arguably totally random) ½% gain; it then proceeds to go down to 127.39 by the end of Thursday. So what happened and why didn’t those great employment numbers drive the market to huge gains? Well, let me list some other “Fundamental” happenings in those two days:

  • • December same-store sales “dissatisfied” – that’s bad
  • • Telecom stocks were also missed. In turn, the telecom sector lost 2.8% in two days – that’s bad
  • • Stronger dollar causes some additional selling in the commodities world – could be good, could be bad, depending on where you sit.
  • • Bernanke tells the US Senate Budget Committee that “the recovery is finally taking hold” - that’s good
  • • Bernanke also says that unemployment is likely to remain close to 8% two years from now – that’s not so good

Then on Friday morning the Labor Department releases its employment figures… 9.4% (from 9.8%) - that’s great! But the number of jobs created was actually only 103,000, way less than economist estimates and those previously reported ADP numbers. It is also reported that the unemployment rate dropped as much as it did because more and more people have stopped looking for jobs.

So what does this mean? It just confirms, “ahgain” as Forrest Gump would say, that he who relies on “Fundamentals” must either be a genius who can efficiently deal time and time again with the multiple quadratic formulas in front of him / her, or has enough credentials to get the credibility required to make calls that in the end are likely to be entirely random and unrelated, as Nassim Taleb very eloquently explains in his book “Fooled by Randomness.”

How many of us have read on Monday afternoon that the Markets went down due to rates increases in China, then went up on Tuesday due to the elections in Brazil, down on Wednesday due to flooding in Central Europe, up in Thursday due to Disney’s numbers and close “mixed” on Friday due to some “pull out of the hat” reason? Is there any wonder why so many of us eschew all “Fundamentals” from our trading decisions?

So why did I even look at Morningstar that Wednesday morning then? Well, I do think they have a value… I want to make sure to drop my small RSX (Russia) position if Putin decides to demote Medvedev and promote himself to the Russian Presidency (some may he has remained President all along, but I digress, and I mean no disrespect here to my Russian friends at all, just trying to make a point), and not wait for the MA crossover, or the ATR/RSI/SAR signals to take place, to make the trade… other than that, they do not have much value, at least for “Trend Following” players; in my humble opinion of course.

What are your thoughts on the topic? How do you use “Fundamentals” in your trading strategy?


Current Positions

My trading for the week was not much of one, as I spent the time building the portfolio in accordance to my own trading strategy (which results in the “boring” 1-2 trades per week.) I have now built positions in the assets below (you can find the specifics here):

EPU Peru
ERX Energy 3X
EWC Canada
EWJ Japan
EWM Malaysia
EWT Taiwan
EWW Mexico
EZA South Africa
FAS Financials 3X
FCG Natural Gas Exploration
IAI Broker-Dealers
IBB Biotech
IYE Energy
IYT Transportation
IYZ Telecom
JJG Grains
KOL Coal
MWJ Midcap 3X
NLR Nuclear Energy
PHO Water
RSX Russia
TBT Treasuries - 2XS
TNA Russell 2000 3X
TQQQ Nasdaq 3X
UPRO S&P 500 3X
XLB Materials
XLI Industrials
XLY Consumer Discretionary
XME Metals & Mining
XOP Oil & Gas Exploration
XRT Retail


I wish I had a better story to report regarding performance, but I seemed to catch a bad break every day of the week. I completed must of my purchases on Tuesday and Thursday, and the Market proceeded to go on a downturn on both days. That said, I’m not totally unhappy, as the benchmarks below show it was a difficult week all around:

“My Hedged Fund” performance – down 0.96%
Total World Stock (ACWI) – down 1.1%
S&P 500 (SPY) – up 0.34%
European, Australasian and Far Eastern Markets (EFA) – down 2.12
Commodities (DBC) – down 2.55

Key Fund metrics include:
Total Leverage – 137% (40% through margin, 97% through 2X and 3X leveraged ETF’s)
Cash – 7%
Portfolio Beta – 1.14
NAV – $9.90 (initial NAV of $10.00)


What Next Week May Bring

Many ETF’s continue to flash “buy signals” even with the difficult 2011 start. Capital Markets (KCE), Junk Bonds (JNK), Steel (SLX), Media (PBS) and Home Construction (ITB) are potential buys. Of these, JNK is the strongest, ITB is the one that worries me the most (those Fundamental thoughts again!)

There are some ETF’s whose trends are beginning to weaken. Those include Water (PHO), Taiwan (EWT), Peru (EPU), and Retail (XRT). Sell signals may hit early next week.

What to expect from me next? I will respond to any and all questions and appropriate comments on a daily basis, but will not formally post on actions / signals / performance until the end of the following week (even if the thread drops in “popularity”… popularity is not my goal here… sorry MeanReversion.)

Happy Trading from snowy Boston


Boston
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Old Jan 8, 2011, 8:56am   #32
Joined Dec 2003
Re: My Hedged Fund - Another "Trend-Following" Post

That's one big long position with A LOT of energy bought at new highs. Not saying it can't go higher but the high and recent energy prices are very well known to all market participants.

Also, where's the 'hedged' part as in 'My Hedged Fund'?
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