Investment and trading performance - year three
It's now almost 3 and a half of years on account that I were given my closing pay cheque and began on my new profession as a speculator (also someday writer, and itinerant consultant), and precisely three years due to the fact I began walking my completely automatic futures buying and selling machine, for which my accounting duration is the UK tax year ending on fifth April. Which means it's the third on this trilogy of which the first two instalments had been:
http://qoppac.Blogspot.Co.United kingdom/2015/04/futures-trading-performance-12 months-one.Html
http://qoppac.Blogspot.Co.United kingdom/2016/04/futures-buying and selling-overall performance-yr-two.Html
Sharp eyed readers will observe a diffused difference among this and the preceding posts - as well as searching at my futures buying and selling I'll also be considering the overall performance of my wider portfolios. One of the motives for doing this is that (spoiler alert) my futures trading hasn't performed that well this year - however because the factor of a managed futures portfolio is to provide diversification that need to be seen inside the context of what the wider market has executed. Another reason is that I'm currently finalising a brand new ebook on constructing funding portfolios; so I concept it might be useful so that you can see how I practice what I hold forth.
As well as looking at performance I'll additionally examine my danger, and provide an explanation for how I'm going to rebalance the 'investment' elements of my portfolio (the 'buying and selling' component is absolutely automated).
My investments
In easy terms this is what my portfolio looks as if:
- An interactive brokers account containing:
- Various other brokerage accounts containing:
- My futures trading positions
- An equity futures hedge
- A mixture of UK stocks and equity ETFs against which the hedge is constructed
- Cash margin
- UK stocks
- ETFs
The reason for all the complexity in my IB account is that when I started trading I didn't have sufficient cash to fund my futures trading; I couldn't sell investments to realise cash as this would have resulted in a lumpy capital gains tax bill; hence I dropped a dollop of stocks and ETFs into the account which I could borrow against for margin and to meet any losses. But I wanted the performance of my futures account to be as 'pure' as possible, so I decided to hedge out the other assets by shorting equity futures against them.
Broadly speaking I favor to institution my investments into the subsequent sub-portfolios earlier than I analyse them:
- A fully automated futures trading system. This requires cash for margin, and has an absolute return or peer benchmark.
- An equity futures hedge, constructed to hedge out the non futures assets I hold in my trading account. This has an absolute return benchmark and is low risk.
- A diversified portfolio of ETFs across stocks and bonds (with a small allocation to other alternatives). This is gradually mechanically rebalanced on an annual basis. Given my current allocation an appropriate benchmark would be a classic 60:40 fund likethis one.
- A portfolio of large and mid cap individual UK stocks; traded (very slowly) using mechanical rules around dividend yield (which you'll find in my new book). Benchmark FTSE 350.
I'm going to have a look at those in reverse order, so we have the broader funding panorama covered before we talk my dire futures buying and selling.
UK stocks
My portfolio of UK shares is selected to give me vast area publicity, with a tilt in the direction of higher dividend yielders. This is partly because dividend is a risk thing which should earn a further threat premium in case you do not thoughts sporting the danger, but additionally due to the fact dividend income is a huge contributor to meeting our family costs.
In terms of numbers this is what the uncooked overall performance looks as if:
Dividends earned: 6.Eight%
Mark to marketplace: 17.Nine%
Total return: 24.7%
Versus a total return benchmark (the FTSE 350 of huge and mid cap shares) which earned 23.5% inside the equal duration, it really is decent however never stunning. However these numbers understate the actual overall performance, due to the fact I took a big bite of cash out of this portfolio last yr and (as a part of my slow readjustment of my investments to lessen my exposure to UK equities, which 3 years in the past stood at sixty nine% of all equities! 59% of my complete portfolio; a long way too high for a well assorted portfolio).
To deal with this we need to calculate the internal rate of return (IRR), for which I used the XIRR function in <insert name of favourite spreadsheet package here>.
Portfolio IRR: 29.2%
FTSE 350 benchmark IRR: 22.7%
Better. Of the 17 stocks I owned at some point during the year, 9 were profitable and 8 were losers. The biggest winners were trucking company Stobart (simple total return, +99%), vampire blood sucking bank HSBC (69%), and manufacturer Vesuvius (24%). Most of the losers were small change losers that I only acquired in January when I did a periodic rebalance, one exception being Braemer shipping.
Incidentally closing year the portfolio returned around plus 8% as opposed to a FTSE 350 lack of 7%. Unfortunately I do not hold facts going lower back further than that.
This is what the United Kingdom equity portfolio currently looks as if (coins weighting as share of this sub portfolio value):
STOB 22.Forty one%
ICP 14.05%
VSVS nine.45%
BKG 9.02%
MARS 7.76%
HSBA 7.Sixty three%
LGEN 7.62%
KIE 7.53%
PFC 7.39%
RMG 7.14%
The portfolio isn't always pretty as textbook as I'd like - Stobart is an apparent overweight even though I bought some in the course of the 12 months, as is the financial area commonly (represented by means of both ICP and bank HSBA); a number of these shares are nonetheless held in taxable accounts on which I need to pay CGT which places a brake on the rebalancing I can do.
Diversified ETF portfolio
This is a traditional bond/fairness strategic portfolio, even though I do have a few other asset lessons in tiny quantities (it would be extra, but bear in mind 1 / 4 of my chance finances is already in a single 'opportunity' asset: managed futures).
I do not goal my asset allocation simply in this portfolio, however as an alternative on my investments holistically. More on that later.
The ETFs I preserve deliver me publicity in equities and bonds throughout all the main areas (asia, europe, UK, US and rising markets) with the exception of Asian bonds where I don't have any exposure. I even have a small quantity in Gold, and industrial assets.
Raw performance-
Dividends: five.Zero%
Mark to market: 21.6%
Total return: 26.6%
That seems first-rate in opposition to the benchmark (Vanguard 60:forty), however once more this is deceptive due to the fact as a part of my rebalancing I turned into a net consumer of ETFs throughout the yr. Using the extra realistic IRR:
Portfolio IRR: 19.1%
60:40 Benchmark: 18.7%
Roughly in keeping with the benchmark. Last year the XIRR become 6.2%, and the benchmark earned zero.Eleven%. Incidentally the benchmark and my own portfolio have carried out so strongly partially due to the depreciation of GBP towards most other countries remaining yr. US traders who make up most of the readership of this blog won't have visible such terrific returns; worldwide equities had been up approximately 14.6% and global bonds were flat, giving a go back of round 9% on a 60:forty portfolio.
It may make greater sense to keep in mind the performance of my investment portfolio 'in toto' (UK shares plus ETF) in view that that is what I goal my asset allocation against:
Whole funding portfolio IRR: 22.3%
60:forty Benchmark IRR: 17.7%
So a ways, so top. I may not show the character ETFs I own, considering it's the general danger in my portfolio that is important - and with a view to come later.
Futures buying and selling and fairness hedge
That become the best news; now for the much less appropriate news. Here is the 'money shot'; a graph showing the whole cost of my buying and selling account (which consider includes my futures trading, a few equities and ETFs which I've already accounted for above, and my futures hedge):
The first plot suggests the performance considering that inception, and the second plot over the last three hundred and sixty five days. In truth I've made almost exactly nothing inside the relevant length (the UK tax yr 2016-17); in percent terms simply 0.3%.
However that internet determine hides quite a few motion; here's the whole breakdown:
Stocks & ETF
Mark to market: 22.6%
Dividends 4.9%
Commissions: -0.02%
Subtotal: 27.6%
Hedge
Mark to market: -13.2%
Commissions: -0.03%
Subtotal: -13.2%
Total for stocks and hedge: 14.4%
Futures
Gross profit: -14.3%
Commissions: -0.73%
Slippage: -0.56% (Bid ask -0.97%, less execution algo profit 0.41%)
Data fees: -0.03%
FX adjustments: 1.74%
Interest: -0.15%
Total for futures: -14.0%
Grand total: 0.3%
So broadly speaking I made a bunch of money on my stocks hedge which I promptly lost on my futures trading. Trading costs were an acceptable 1.3% versus a backtested 1.5%. As usual commissions were a little higher than expected (since I don't calculate them for rolls), bid-ask was exactly in line, and algo profit was a bonus since I don't include that in my backtest to be conservative.
Statistics
These are all for my overall account (futures, stocks, and hedges):
Standard deviation of returns (based on weekly, annualised): 22.2% versus long term target 25%
Average drawdown: 9.6%
Max drawdown: -19.4%
Worst day: -5.7%
Best day: +4.8%
Win/Loss ratio: 1.66
% wins: 37%
Benchmarking
I've said before it's difficult to benchmark this portfolio against a pure managed futures fund like AHL, my former employers, because (a) the volatility target I use is a little higher than typical and (b) the inclusion of my stocks plus hedging returns.
Nevertheless, here are the results of my portfolio for the last 3 years:
Hedge: -1.1%, 16.3%, 14.4%
Futures: 58.2%, 23.2%, -14.0%
Net: 57.2%, 39.6%, 0.3%
And for comparisionAHL diversity GBP class with returns multiplied by 2.8 (reflecting my 25% risk target versus the 9% of this AHL fund), of course this is a pure managed futures portfolio:
Futures: 106.9%, -10.6%, -6.2%
[All these figures are based on notional capital; they would be around 4 times higher if calculated as a percentage of margin. AHL figures have fees deducted; my futures figure ignores any cash I'd get on excess margin]
Over the entire 3 years using constant capital (so I can just add up annual returns) the returns of my pure futures portfolio are around 67% versus 77% for AHL; equating to a Sharpe Ratio of just under one for me; exactly in line with my backtest expectations (to which I'd add a large pinch of salt). Not bad for a one man and his laptop operation. Casting a slightly wider net, the SG CTA index had returns of 30%, -3.6% and -7.5% over the relevant three years.
Overall I think it's fair to say I've probably underperformed the overall CTA world this year based on my pure futures performance, though over two and three years I'm fairly happy with how things have gone.
Performance by instrument
The biggest winners over the year were: VIX +6.4% (contribution), AEX +4.7%, V2X +4.3%, JPY +2.3% and NASDAQ +1.2%
The losers were GAS_US -5%, Corn -2.7%, Eurodollar -2.6%, GBP -2.2%, BTP -2.0%
Only an idiot couldn't have made money out of being short volatility this year; firstly the level slightly fell (from around spot 14.1 to 12.9 over the year) but more importantly there was the usual strong roll return (effectively earning the volatility premium):
AEX is a more interesting picture:
Here the system gradually bled a little money whilst keeping positions small. Then once an uptrend was confirmed in mid december it went strongly long and has benefitted from the continuing rise since then.
JPY (the JPYUSD IMM currency future) shows a classic trend following picture:
There is only one decent trend in the whole year, and the system captures it in classic fashion, giving up a little on the entry and the exit, and bleeding slightly the rest of the time.
What about the losses? Heres GAS:
This is an evil whipsawing with predictable results. Eurodollar is normally a star of trend following portfolios but not this year:
The problem here is that the strong carry in Eurodollar keeps us long even as the trend moves against us after Trump is elected. Another topical market was GBPUSD:
You can probably spot June 23rd! There isn't much one can do about this kind of event, except diversifying; because I have over 40 futures markets the damage done by this multiple sigma event was limited to just 1% of portfolio value, and I actually ended up as a net beneficary of Brexit this year (see here).
Overall performance
Summarising my overall investment portfolio, the numbers look something like this (as a percentage of my total investment assets, including cash held for margin):
Sub-portfolio / contribution
UK Shares +8.0%
ETFs +15.8%
Hedge -2.7%
Net investments 21.1%
Futures trading -2.9%
Grand total +18.2%
I think a reasonable benchmark here again is a fully invested 60:40 portfolio I'd hold if I didn't do any trading; and I've narrowly underperformed that (simple return 19.3%). But to reiterate, adding a diversifying asset like managed futures in your portfolio reduces your risk and improves your sharpe ratio; it may also improve your overall return (and this has certainly what has happened in backtesting and also over the last 3 years) but it won't do so every single year. For example, here are the figures for last year (2015-16):
Shares & ETFs +6.1%
Hedge +3.8%
Net investments 9.9%
Futures trading +5.4%
Grand total +14.4%
The benchmark here (60:40 again) barely moved with a total return of 0.1%. Clearly the previous year 2014-15 (for which I don't have precise figures) would have been even better since managed futures had a fantastic year.
It's worth considering what might happen in another 2008 event; with equities down 40% and assuming bonds don't bail you out this time round you're looking at a net loss of around 36% in a 60:40 portfolio. If managed futures do as well as they did in 2008 (around 2 times annual vol target, or 50%) then hypothetically that would give me the following set of returns:
Shares & ETFs -36%
Hedge +4%
Net investments -32%
Futures trading +10%
Grand total -22% (versus benchmark 60:40 -36%)
That 10% reduction in losses is the insurance policy that managed futures would hopefully provide in a total market meltdown, and it's worth occasionally underperforming the 60/40 benchmark to get it.
Risk analysis and rebalancing
As part of this annual evaluation I like to look at my risk and evaluate where some rebalancing might be prudent.
Here are the raw figures. The equity allocation includes the effect of my hedge.
Asia EM Euro UK US Global Total
Bonds 5.06% 3.97% 3.93% 7.17% 1.15% 21%
Equity 6.85% 7.62% 11.32% 21.55% 0.41% 0.07% 48%
Futures 27.55% 28%
Commodities 0.13% 0%
Property 3.22% 3%
As an aside 'property' does not include the value of the house where I live, which is excluded from these calculations. Commodities is a small investment in a gold ETF.
Another way of looking at this is to work out the geographical allocations within bonds and equities, as a proportion of the asset class:
Asia EM Euro UK US Global
Bonds 0.0% 23.8% 18.6% 18.5% 33.7% 5.4%
Equity 14.3% 15.9% 23.7% 45.1% 0.9% 0.2%
My long term strategic risk allocation is: bonds 20%, equities 50%, futures trading 25%, others 5%. I use simple trend following rules (another plug for the new book if you want detail) to vary these weights, which right now are suggesting an overweight to equities with a little less in bonds. After some judicious rebalancing, being careful not to incur a tax liability and minimising transaction costs, my new allocation is: bonds 17%, equities 54%, futures trading 26%, others 3%.
The regional allocation in each asset class is now:
Asia EM Euro UK US Global
Bonds 0.0% 27.3% 21.0% 19.2% 27.0% 5.5%
Equity 14.8% 20.6% 19.9% 37.8% 6.7% 0.1%
Remember the lack of Asian bond exposure is because of a lack of suitable ETFs, not because I hate them.
Summary
Overall I'm perfectly happy with my overall investment strategy. One year isn't long enough to give you statistically significant evidence, and indeed neither is three years, but .
Doing this kind of analysis is quite time consuming, even when you are a spreadsheet ninja, and filling in tax returns also becomes quite onerous. Nevertheless so far at least following an active investment and trading strategy has been a good use of the few days a year I spend on this activity.
