My Hedged Fund - Another "Trend-Following" Post

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myhedgedfund

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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.

Through this post (and my blog still under construction here) I will be making public my trades as they happen, which is likely to be not more than 1-2 times per week. In fact, based on current trends, it may be a few weeks before I trade again.

Current real capital on this account as of 1/3/11 will be ~$200,000, with another ~$100,000 or so added on top through margin. Current investments are below, a total of 31 ETF's (this is as it just happens the max umber of asset classes I can own as per my strategy), all with trends meeting my set technical criteria. I'll make allocations and balances public before 1/3/11.

The intent of the post is not educate, as I don't feel qualified to do so, but just to make public my "Trend-Following Trading Journal"... if you will. Follow this plan at your own risk! Looking forward to engaging some of you in productive dialogue throughout 2011 and beyond...

Boston



Ticker Asset Class
IBB Biotech
EWC Canada
KOL Coal
XLY Consumer Discretionary
XLP Consumer Staples
VIG Dividends
DDM DJIA 2X
ERX Energy 3X
JJG Grains
IAI Brkr-Dlrs
KRE Reg Banking
EWJ Japan
UYM Materials 2X
XME Metals & Mining
EWW Mexico
MWJ Midcap 3X
TQQQ Nasdaq 3X
DIG Oil & Gas 2X
XOP Oil & Gas Explor.
XRT Retail
TNA Russell 2000 3X
RSX Russia
UPRO S&P 500 3X
SOXL Semiconductors 3X
EZA South Africa
EWT Taiwan
IYZ Telecom
IYT Transportation
TBT Treasuries - 2XS
PHO Water
KCE Capital Mkts
 
Admirable, but you might struggle to keep interest up with such low trading frequency.

What type of criteria do you use to trade? (e.g. Donchian channel, Bollinger bands, etc)

In addition, what % return are you hoping to achieve for 2011, and what kind of drawdown would you anticipate?
 
meanreversion said:
Admirable, but you might struggle to keep interest up with such low trading frequency.

What type of criteria do you use to trade? (e.g. Donchian channel, Bollinger bands, etc)

In addition, what % return are you hoping to achieve for 2011, and what kind of drawdown would you anticipate?
Click to expand...

Very fair point (re: boredom), and I do struggle at times due to inactivity, but I try to temper the desire to trade through administrative metrics, by setting low turnover goals. These are admittedly simple (no more than 100 trades per year assuming 2.5% of capital per trade), but do serve as a check on the normal human tendency to look for action.

The main criteria I use is the traditional moving average (of various lengths), no need to reinvent the wheel from my perspective. In order to make a final buying decision, I do look at asset betas (trying to achieve a neutral portfolio beta)and standard deviation adjusted for price (the lower the better); I also use ATR's to drive some selling decisions.

This conservative approach is unlikely to create massive returns, although I do use margin on 50% on half of the account, and leveraged Index ETF's (2 and 3X) on the other 50% to drive better returns. I will not predict returns, but backtesting shows max drawdowns of 30-35%.

Any recommendations for improvement? I'm always open to incremental changes...

Best for 2011...


Boston
 
Wow, you're the FIRST person ever on this website to mention drawdown without even alluding to a desired return!

Drawdown of 35% is quite chunky, and might deter potential investors down the line (if you proceed in that fashion).

I think the reason for this is the low number of trades - 100 a year is very few (especially when you trade all those markets). So you're combining very low trade frequency with high capital risk (I usually bet 0.75% per trade on my trend system, in 10 markets) which will necessarily lead to high drawdown. After all, those pesky moving averages take an age to catch up with the market!

My system trades about 15 times a month, admittedly not a lot more than yours, but as time has gone by I'm starting to realise the value in keeping drawdown limited. I had two instances this year of 30% drawdowns, and I don't particularly want to go through it again (although the drawdown was from giving money back to the market, there's nothing to say you can't set a drawdown limit as well).

What software do you use, out of interest? Also, is this your only income or do you also have a job?
 
Initial asset class here... investments made at the end of 12/31/10 trading day for a total of $107,639. An additional investment of $201,570 (including margin) will be made on January 4th.
 
Ok, very specific. Can I ask what you're looking to gain from keeping this public record, is this with a view to raising outside funds?

Do you also have a day job?
 
meanreversion said:
Ok, very specific. Can I ask what you're looking to gain from keeping this public record, is this with a view to raising outside funds?

Do you also have a day job?
Click to expand...

I am not looking to raise funds... and yes, I do have a day job. But, what is there to gain? It is a fair question...

One of the most significant challenges (in my opinion) system traders have is sticking to the strategy. It is tempting for some of us to deviate from our plan whenever significant drawdowns (or even minor losses) are experienced. Some of the mistakes include:

- Seeing lines where they don't exist,
- Touches where there aren't any,
- Trying to insert macro-economic events in statistical calculations,
- Questioning past decisions / data,
- Looking for alternate asset classes
- and... as you know... many, many more

In making my trading public I am trying to acquire yet an additional defense against strategy deviations. The mere possibility of a reader questioning one of my moves will help keep me straight... I must always be able to explain away my trades using my strategy...

"Losing face" in "public" should be a good deterrent. That said, please know that I consider myself to be a disciplined investor, and have not deviated from my strategy in a long time, but, it's yet another fail-safe.

Thanks for the good question...


Boston
 
adamscj said:
meanreversion - two 30% drawdowns in a year sounds quite hefty - what kind of annualized vol are you running at?
Click to expand...

Good question. The big drawdowns I recall from memory (it may have been more like one of 30 and one of 20-25, but still large). I only record my month end equity, which doesn't capture the full drawdown.

To calculate my volatility, do I need daily equity numbers?
 
meanreversion said:
Good question. The big drawdowns I recall from memory (it may have been more like one of 30 and one of 20-25, but still large). I only record my month end equity, which doesn't capture the full drawdown.

To calculate my volatility, do I need daily equity numbers?
Click to expand...

The strategy Boston (OP) is looking to run is similar to many of the systematic hedge funds who developed the turtle rules into large scale trend following operation. As I'm sure you know they have different methods of measurement when it comes to performance compared to your average day trader, looking at things like annualized returns, annualized vol (therefore Sharpe) and max drawdown etc. All of these are calculated off daily returns (as a % of investment) so yes, you would need daily equity figures to be accurate.

The reason for working out drawdown using dailies is that most of these funds act as CTA's rather than true "black box" hedge funds and so will offer daily liquidity, unlike the macro/discretionary guys who might only give monthly or quarterly liquidity windows. Therefore if you can draw your money out at any time it obviously makes sense to work out all your NAV figures on a daily basis, whilst reporting results annualised for consistency
 
And sorry I should have said (apologies if I'm stating the obvious) you can calculate the annualized vol by simply taking the standard deviation of daily returns multiplied by 260.
 
adamscj said:
As I'm sure you know they have different methods of measurement when it comes to performance compared to your average day trader
Click to expand...

You mean John Henry and David Harding aren't trying to make 50 pips a day? :)

Good replies, interesting to hear the professional view. Are you still on the buy side or independent now?
 
meanreversion said:
Good replies, interesting to hear the professional view. Are you still on the buy side or independent now?
Click to expand...

I'm actually back on the sell side now for my sins. I'd love to spend my days at home day trading but I've got a young family to support and I can't justify giving up my current comp for unknown returns to my wife!

I do a bit of FX long term trend following on my own account and also developed a couple of intraday FX strategies that I'm currently running in Sim. Having worked in the investment community I have made a few good contacts so I'm still holding onto the dream that oneday I'll have something good enough to start my own fund and get some decent backing ($50m has to be the minimum for a 2+20 type fund once you've taken IT costs and potential other employees into account)
 
meanreversion said:
Spent several years on the sell side myself, you can't really knock the pay.

My main strategy is medium term trend following where a successful trade could last a couple of months. I trade FX, commodities and interest rates.

You (and Boston) might find this link interesting -

http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/
Click to expand...

Thanks, I haven't come across this link before but the buy-side fund I worked for is on the list.

I find it interesting how everyone still talks about the turtles (and the rules do work) but that was a long time ago and I don't think people fully appreciate quite how far some of these firms have come since then with the sophistication of their models. Don't get me wrong - the basic ideas of MA crossovers or breakouts remain the same but portfolio and risk management is a mile away from what the original guys were doing.

Sounds like you have similar interests to mine, I'll ping you on the side as I already feel guilty about cluttering up Boston's thread!
 
Boston, wouldn't this thread be better placed under trading journals? You could ask one of the moderators to move it. Also, you should occasionally type something, whether you're trading or not, because otherwise the thread just sinks to the bottom of the sea. Just my 2c ..
 
adamscj said:
$50m has to be the minimum for a 2+20 type fund once you've taken IT costs and potential other employees into account)
Click to expand...

This is where I have trouble understanding the amount of money needed to run a trading operation. Believe me I could run $1billion just by myself with £1000 a month running costs, not including office rent etc.

All these firms with massive personal, some of them hundreds if not thousands, what do all of them do in relation to actual trading profits delivered?
 
adamscj said:
And sorry I should have said (apologies if I'm stating the obvious) you can calculate the annualized vol by simply taking the standard deviation of daily returns multiplied by 260.
Click to expand...

Multiply by the square root of that number, no?
 
meanreversion said:
Boston, wouldn't this thread be better placed under trading journals? You could ask one of the moderators to move it. Also, you should occasionally type something, whether you're trading or not, because otherwise the thread just sinks to the bottom of the sea. Just my 2c ..
Click to expand...

Thanks for the note... I'll look into moving the thread over to "trading journals."

Today I entered trades on ERX (Energy), MWJ (Midcaps), TNA (Small Cap), TQQQ (Nasdaq) and UPRO (S&P 500); these are all 2X and 3X leveraged ETF's. Timing was not the best, as I have caught most of the selling today. Feeling a little down, but I am not worried, as the mid-term trends continue to give out strong buy signals.

Total investment value in account of ~$250K, with 20% margin. Actual total leverage is running at ~110% when taking into account the leveraged ETF's. I feel a bit nervous, but again, the charts and indicators are very clear; now is the time to buy. May be adding some additional positions late in the week.

As an FYI, I'll be providing short running commentary on my investments as I make trades (1-2 times per week on the average), and a summary of all trades and potential future trades at the end of each week.

Additional details on current holdings can be found here.

Best,


Boston
 
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