Futures trading performance: Year one
I began buying and selling my automatic futures buying and selling device at the beginning of the modern UK tax yr, on the seventh April 2014; exactly a 12 months in the past. So it looks like a great time to check my overall performance to this point (executive precis: brilliantly flukey).
Cash overall performance
I'm going initially the actual exchange within the coins cost of my account. The numbers right here are shown as a percent of the capital I commenced the year with. The common capital at threat over the 12 months various (I'll go into this under).
So I've extra than doubled my cash, as a minimum before the tax guy takes his proportion. Let's have a study in which I won or misplaced that in some greater element.
To complicate matters barely I in part fund my trading account with shares (as opposed to sell them and pay capital gains tax), and I occasionally ought to borrow a few money secured on them for margin. Because I don't need the inventory exposure to have an effect on my account fee the stocks are hedged with FTSE and EUROSTOXX futures. All this provides a bit of noise to my income as no hedge is ideal; you could consider this as a mini fairness neutral hedge fund.
Stocks:
Mark to market: nine.2%
Dividends: 7.Thirteen%
Commissions: -0.05%
Stamp responsibility: -zero.38%
Sub overall: 15.9%
Stock hedges:
Mark to market: -18.1%
Commissions: -0.06%
Sub total: -18.1%
Total for shares hedge: -2.3%
Main futures buying and selling:
Gross earnings: a hundred thirty.4%
Commissions: -2.5%
Slippage: -zero.6%
Data expenses: -zero.04%
FX trading: -zero.Eight%
Interest: -zero.3%
Total for predominant buying and selling: 126.Four%
Grand total: 124.1%
Couple of factors to notice. Firstly my hedge turned into moderately a hit, however no longer best. Given the large size of a typical futures settlement its as appropriate as it is able to be.
The 'fees of doing commercial enterprise' are worth unpicking. We can't manage revenue, but we will to an volume control expenses. Commissions and slippage I discuss in greater detail underneath. Data charges are quite a whole lot as little as they can be.
FX buying and selling and hobby move together. Because I need to maintain margin in overseas currency I even have choices. I can eithier borrow it, pay interest, and risk the foreign foreign money appreciating. Or I can trade GBP for foreign forex, pay no interest, and chance the overseas foreign money depreciating.
I mix and in shape those methods, looking to borrow handiest in low interest currencies like CHF, and avoid keeping massive extra coins balances in any currrency as they don't pay much hobby and provide me extra chance. The 1.1% fee here is greater than I'd like, and turned into mainly because of losses in preserving EUR balances which depreciated against the GBP, of 1.9% of starting capital. But I did make about 4% of beginning capital making a bet towards EUR futures as part of my essential trading.
This is a fee of doing business, which with a bit of luck will even out over numerous years.
Performance for capital at threat
I do not think cash overall performance is the first-rate way of comparing performance. This is because I adjusted the amount of most danger in my portfolio at some stage in the 12 months (each the amount of cash at hazard, and the target volatility).
(In subsequent years I intend to keep this most constant, so matters can be less complicated)
Here is the overall performance whilst the impact of changing most threat is removed. This is shown as a percentage of capital, with a constant annualised threat goal of 25% as I currently run.
Note that the hazard is extra stable. Its greater suitable to workout things like Sharpe Ratio on account curves like those. A hypothetical investor in my "fund" could have received a compounded version of those returns; their returns might be the same as those on a log scale.
Here are a few statistics.
Return: fifty seven.2%
Sharpe Ratio: 2.54
Realised annualised trendy deviation: 22.0% (as opposed to target 25%)
Average weekly advantage as opposed to loss: 1.Sixteen
Hit charge (percentage of high quality weeks): zero.68
Profit component: 2.45
Average drawdown: -2.3%
Worst Drawdown: eight.Nine%
Proportion of weeks in drawdown: seventy seven%
Benchmarking
My buying and selling system frequently uses a combination of fashion following and bring, over a varied set of futures markets. This makes it similar, despite the fact that much less difficult and much less diversified, than the strategies run by way of the likes of AHL, Winton and Aspect.
Looking at entire months AHL's flagship fund made round 33% to the cease of March. Here are my month-to-month returns, with the same figures for AHL (Man AHL Diversity GBP) in brackets:
2014
April: 5.8% (1.3%)
May: 14.6% (6.6%)
June: 9.4% (2.4%)
July: -4.1% (-0.1%)
August: 11.1% (5.1%)
September: -4.4% (0.2%)
October: 1.8% (1.0%)
November: 9.2% (5.7%)
December: 0.6% (2.7%)
2015
January: 8.0% (5.7%)
February: 5.4% (1.2%)
March: -0.4% (1.3%)
April: -0.1% [part]
Based in basic terms on the 12 matching month-to-month figures the annualised Sharpe Ratios are 2.Eight (me) as opposed to 4.Zero (AHL). The correlation changed into zero.Eighty four. So my performance changed into properly, however not as accurate as my former agency, in particular when you keep in mind that costs have been deducted from their performance.
AHL became an awesome stand out performer in the CTA universe, but different large CTA's did well, with Sharpes from round 2.Four (Cantab) up to three.6 (Aspect), with Bluetrend and Winton someplace in between.
As I said in my simulation the last 12 months have been amazing for trend following, but not quite as good for other types of signals. AHL and other CTA's probably have higher allocations to trend following than I did and this partly explains their outperformance; I would probably have done better on a relative basis in 2009-2013 when trend following signals struggled.
However I'd anticipate AHL to do better in the long run as they change over 300 markets versus forty five (that is a large benefit) and feature a greater sophisticated set of trading techniques (that's much less of an advantage than you might count on). You'd desire that 100 or so people running full time ought to beat one man, spending 10 mins an afternoon.
Performance by way of futures agreement
Which contraptions did great remaining yr? Let's look at it by means of asset magnificence first. Numbers shown are the contribution to overall profits.
Bonds: 40.Three%
STIR: five.Nine%
Volatility: five.7%
Oil and Gas: five.Four%
FX: 4.6%
Equities: 4.Four%
Ags: -1.9%
Metals: -0.2%
Clearly this has been the year of the bond, or at least the rolling 12 month of the bond. Let's dig into character gadgets.
First the terrible news. The worst performers had been Korean KOSPI equities (-1.2%), Lean Hogs (-1%) and Swiss SMI equities (-zero.9%). The best were French OAT bonds (contributing 7.Nine%), Italian BTP bonds (6.3%), VIX (four.9%) and Korean three year bonds (three.Nine%).
So we don't want to look very far for the reason for the overall performance in bonds. Here are the us of a via usa returns:
German 10.1%
French 7.Nine%
Korea 7.5%
Italian 6.4%
US five.Four%
Australia 3%
Prices of European bonds went up in a instantly line, with best a brief pause in September. Although you may see the leap in March whilst QE become announced this changed into just the icing on what became already a totally large cake. Other bonds, and STIR, additionally contributed however no longer by using as an awful lot, bringing us to the weird state of affairs wherein German 10 12 months yields are 19bp, French 50bp, Italian 1.30%, and US yields are almost 2%.
(All those graphs display the overall go back of the future on the top panel, and the gathered income as a share of total capital on the lowest)
Volatility was a greater exciting tale. Essentially we benefited from a squeeze in volatility that lasted just months. After that vol has been everywhere in the vicinity. A top buying and selling machine will capitalise on opportunities; then carefully husband its capital once they aren't around. You can genuinely see that going on right here.
Another 'one off' trend become in crude oil and different energy merchandise, where we had a decent downtrend for the second half of 2014. I participated in some of that; here the trouble became the exceedingly big danger of the crude oil destiny which meant I could not keep a role until the fashion become half of over (I had comparable problems in Gas and heating oil). However we nevertheless ended the 12 months in profit.
Another more current fashion has been the rally in the greenback, observed in its lethal duet with a crumble inside the Euro. Here once more we see a classic fashion following account curve. We have minimum risk until the fashion starts in earnest on the start of the year. Then we participate in the move, till it reverses. The reversal charges us something, however we dangle directly to maximum of our earnings, and then lessen our chance again looking forward to any other move.
In comparison the other asset classes had been disappointing. Although there were no big horror shows, it's probable worth reminding ourselves of the risks of trading with one final photograph from one of the worst markets.
The Swiss equity marketplace became as dull as the united states itself for maximum of the yr (with apologies to my swiss friends for the national stereotyping). Then the SNB, of their countless knowledge, decided to depeg the Euro. You can probably pretty much make out on the chart where it became. I wasn't, thankfully, trading the CHFEUR FX charge or CHFUSD future. I idea that having something to do with this rigged market was the peak of insanity. Had I been doing so the damage from this debacle could have been an awful lot worse.
The lengthy view
A few weeks ago I showed that a simulation of this system had a pre-value Sharpe Ratio of around zero.94, with around 0.06 spent on prices (round 1.Five% of capital with 25% annualised chance). If we expect that 0.88 is the 'real' SR, and that annual returns are normally distributed, then a one year SR of two.54 is a one in twenty yr event. It's high-quality to start off this manner, however such brilliant traits in bonds, with some chucked in for other markets, is not likely to be repeated anytime quickly.
Risk versus expectations
I am obsessed with two things: risk, and costs (okay there are other things I'm obsessed with, like my weird crush on Olivia Colman but I'm talking specifically about this trading system now). I am not obsessed with performance (except in as much as day to day p&l tells me what my realised risk is). You probably don't believe me but until I did this performance exercise I was completely unaware of the italian bond yield, or that french bonds had been responsible for such a big chunk of my performance; though I had been vaguely aware of the VIX squeeze last year, and the dollar downtrend this year.
So why I am obsessed with risk, and costs? It's because unlike performance they are controllable. You can't control performance, it's just down to luck. Having the illusion of control can lead to meddling with your system, and destroying it's performance.
Anyway here is my actual and expected risk (measured in units of annual vol per year, and correcting for changes in risk targeting. Expected risk is missing before June as before then I didn't calculate it). The long run system target is 25%. They track each other reasonably well, although the actual risk measure is noisier. I'm comfortable with how well my risk targeting is working.
Costs
The other thing I am obsessed with is trading costs, both commissions and slippage (the difference between where I get filled, and the mid price when I submit the order).
In terms of expectations I said I expect my overall cost bill to be around 1.5% a year, based on simulation. The split it varies by market, but very roughly around 20% of that (or 30bp) should be commission, and the rest (120bp) slippage.
My commission bill for the year (once I've corrected for changes in capital at risk - so its different from the cash figure above) comes in at 48bp, which is a little higher. There are a few reasons for that. Firstly my simulated cost bill doesn't include rolling costs. Secondly I've experimented with trading my system at two or three different speeds over the last year; now I'm comfortable with my trading costs I've settled at a slightly slower speed which the simulated expectation reflects.
The good news is I've only paid 17bp of slippage. If I look at a time series of slippage paid over the year its quite noisy, but it looks like I've effectively paid negative slippage (i.e. been paid to trade) since I started using a simple execution algo for trading, rather than just placing market orders.
Overall I'm comfortable that 1.5% should be a very conservative figure to pay in costs annually.
Lessons learnt
Don't focus on things you shouldn't control- only the things you can
Keep your costs low. Don't trade quickly on expensive markets in the expectation you'll get enough of a high Sharpe Ratio to compensate. Watch your risk like a hawk.Ignore your performance, or you'll be tempted to meddle. A well designed system will do all the right things for you. Don't read the financial news. I can't believe I'm lending money to the Italian government at 1.3% (Apologies to my Italian friends. Actually, no apologies. I know for a fact none of you guys would lend them money at any rate). If I'd realised this sooner I might have cut a very profitable position.
Diversify
Who knows where the next mega trend will come from? If I'd just been trading US bonds, or commodities, I would have been barely up, flat or even down this year. Have the most diversified portfolio you can for the amount of money you have.Patience and realism
It's been fantastic to start off like this. But a downside of that is when (not if) I start to lose money, and enter say a 15 or 25% drawdown, it will be harder not to be patient since if I'm not careful I'll have unrealistic expectations. Anyone starting to trade this kind of system in 2009 would have really been hacked off by March 2014. If they'd thrown in the towel then they'd have missed out on the incredible performance we've seen since then.If you believe in your system, then sooner or later the markets will turn in your favour. Until then your job is to lose the minimum amount of money whilst you wait. Those losses are just the antes you have to pony up whilst you wait for a decent hand (yes I've been reading poker books recently, can you tell?).
