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 adamscj Ok makes sense...if you're running at around 30% vol then the drawdowns you mentioned seem consistent ...

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Old Jan 8, 2011, 1:24am   #31
Joined Dec 2010
Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by adamscj View Post
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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Old Jan 8, 2011, 9:02am   #33
Joined Dec 2003
Re: My Hedged Fund - Another "Trend-Following" Post

Your rule 3 states this -

Be patient with winning trades; once a trade is put on, give it time to work, give it time to insulate itself from random noise. Be enormously impatient with losing trades, small loses and quick losses are the best losses.

My question is this -

Say you buy something on Monday and it goes down on Tuesday and Wed and even Thursday how will you determine whether to give the losing position 'time to work' because the 3-4 day downmove might be random versus 'being enormously impatient with losing trades, small loses and quick losses are the best losses.'

I'm not trying to be a smart dick but that rule 3 looks like it's going to hinder your trading far more than it helps because it contradicts itself. In effect you'll only know after the fact whether to give the trade the room it needed (assume your timing will always be slightly off) or whether it was right to cut it very quickly.
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Old Jan 8, 2011, 9:27am   #34
Joined Jan 2009
Re: My Hedged Fund - Another "Trend-Following" Post

Another question I would have for you is this -- by whichever metric you use to enter long positions, would all your longs have been in place had you started a month earlier? Or two months earlier?

The way I operate is if I add a new market, it may already be "long" by the system rules, so I need to wait until it is "naturally" stopped out before looking for a new signal to go long.

In other words, if I was starting a trend fund on Jan 1st, unless the market retraces a few percent, I would be waiting a while to establish my first trade.
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Old Jan 8, 2011, 10:04am   #35
Joined Sep 2008
Re: My Hedged Fund - Another "Trend-Following" Post

It's also interesting that you've got a discretionary element in there. In my opinion you should keep the technical/trend elements separate from any "views" you may have on the market as they are at completely different ends of the investment strategy spectrum
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Old Jan 8, 2011, 12:11pm   #36
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Re: My Hedged Fund - Another "Trend-Following" Post

Any thoughts JRP? You're a bit of a trendie yourself, no?
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Old Jan 8, 2011, 12:17pm   #37
 
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Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by myhedgedfund View Post
Yet another trend-following post?

I've been trading ETF's using trend-following techniques for some time now, and have decided to make public my real-life trading activities starting with the new year.
http://www.trade2win.com/boards/trad...ous-metal.html

What is your opinion (If you don't mind)?
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Old Jan 8, 2011, 12:59pm   #38
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Re: My Hedged Fund - Another "Trend-Following" Post

You've got about 4 things to respond to there Boston, should keep you busy
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Old Jan 8, 2011, 4:11pm   #39
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Re: My Hedged Fund - Another "Trend-Following" Post

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Originally Posted by meanreversion View Post
Any thoughts JRP? You're a bit of a trendie yourself, no?
Having read Boston's rules, the only one i'd have a mental conflict with would be no.6; When sharp losses in equity are experienced, take some time off. Many traders employ this rule and I can see why you would if you're mainly a discretionary trader. However in my experience of trading a medium term FX trending strategy, sharp losses in equity more often than not immediately precede opportunities to position yourself in the early stages of trends, as the markets become less cluttered due to the weeding out process that naturally has to occur. Could this rule actually end up costing you more Boston? I know when i've had 6/7 losses in a row as part of a more prolonged drawdown, i start to get a bit excited (weird i know), because usually good things start to happen if you keep taking your trades.

Last edited by JRP2891; Jan 8, 2011 at 4:17pm.
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Old Jan 8, 2011, 4:15pm   #40
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Re: My Hedged Fund - Another "Trend-Following" Post

I would second that. I read a report on the web once (can't find it now) which examined how systematic funds occasionally underperformed the market, but when that happened it was usually time to invest in them.

Obviously this is all a bit anecdotal in the sense that just because you have 7 losses in a row, doesn't mean you can't have another 7 losses in a row .. but generally this doesn't tend to happen.
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