Trading performance - year four
Time flies, and it's time for every other annual update on the performance of my very own investment and trading. Previous updates may be found right here, here and right here. These updates follow the UK tax yr; from 6th April to 5th April, as I need to do my taxes anyway it makes feel to examine the whole thing at the same time.
Following the thoughts numbing element of the overall performance evaluation there are some concluding mind on existence, the universe, and the whole thing referring to systematically making an investment / trading for a dwelling.
Investments and benchmarking
My investments fall into the subsequent categories:
- In my investment accounts:
- UK stocks
- Various ETFs, covering stocks, bonds, and gold
- In my trading account:
- Various ETFs, covering stocks and bonds
- A futures contract hedge against those long only ETFs in 2.1, so that the net Beta is around zero
- Futures contracts traded by my fully automated trading system
- Cash needed for futures margin, and to cover potential trading losses (there is also some cash in my investment accounts, but it's pretty much a rounding error)
I'm except from this evaluation the fee of our residence (and any debt secured against it), described gain pensions, and my 'cash waft' - more or less 3 months of family expenditure that I preserve segregated away from my brokerage debts. Anyone who's residing entirely or partly off funding profits might do well to keep a comparable go with the flow, as dividends do no longer arrive in clean lumps during the 12 months.
For the functions of benchmarking it is then handy to mixture my investments inside the following way:
- A: UK single stocks, benchmarked against any dirt cheap FTSE 100 ETF (FTSE 350 is probably a better benchmark but these ETFs tend to be more expensive).
- B: Long only investments: All ETFs (in both investment and trading accounts) and UK stocks, benchmarked against a cheap 60:40 fund. This is the type of top down asset allocation portfolio I deal with in my second book.
- C: Equity neutral: The ETFs in my trading account, plus the equity hedge. Benchmark is zero.
- D: Futures trading: Return from the futures contracts traded by my fully automated system. This is the type of portfolio I deal with in chapter 15 of my first book. Benchmarks are a similar fund run by my ex employers, or any CTA index of your choosing. The denominator of performance here is the notional capital at risk in my account.
- E: Trading account value: This is essentially everything in my trading account, and consists of equity neutral + futures trading. No relevant benchmark.
- F: Everything: Long only investments, plus futures hedge, plus futures trading. For the benchmark here again I use a cheap 60:40 fund, but I include the value of any cash included in my trading account, since if I wasn't trading I could invest this.
If you decide on maths, then the connection to the primary set of categories is:
A = 1.1
B = 1.1 1.2 2.1
C = 2.1 2.2
D = 2.Three
E = 2.1 2.2 2.3 = C D
F = 1.1 1.2 2.1 2.2 2.3 2.Four = B 2.2 D 2.4
I encompass this to point out that during many cases you cannot just 'add-up the figures protected here across classes.
UK Stocks portfolio
My UK inventory investments were in a duration of transition for the last few years. The aim is to run these absolutely systematically (although now not in an automatic style), with all belongings held in tax free debts in order that capital profits tax does now not devour up returns. The device I use is described in this put up I wrote here; with the twist that I now put in force industry diversification. It is in truth very much like the list of filters I describe in chapter eleven on fairness investing in my second e-book; with the addition of a stop-loss / momentum promoting rule.
However there are some legacy problems, specifically I even have more than one huge positions which I've been tactically reducing my publicity to (to maximise using capital profits allowances).
Anyway enough of a preamble, here are the numbers as a % of initial capital cost:
Dividends: 5.Eight%
Mark to marketplace: 12.0%
Total go back: 17.Eight%
As with previous years the total return figure is misleading as I was a net seller of UK stocks; calculating the IRR I get 18.3%. This compares extremely well with the benchmark which came in at 2.2% (don't get excited - this is probably the high point of this post!).
I've truly outperformed the FTSE with my UK stock selecting over every of the last four years; that is nowhere close to a statistically substantial report (and I'm pretty sure that ) however it does give you pause for idea. I'll come lower back to that notion later.
I owned thirteen UK stocks in some unspecified time in the future all through the yr (beginning and finishing with 10 shares, three of which were replaced according to the structures guidelines (KIE, MARS and PFC). The different trades I did were further top reducing of the huge role in STOB. Stellar performers had been ICP, RMG, BKG and STOB (all of which earned over 25% measured with simple total go back); while all the shares I bought ended badly down (in part reflecting the stop loss which intended they were sold on a loss, but additionally reflecting the fact they didn't sharply recover through yr end making me seem like an idiot).
Current holdings then are:
ICP 18.Eight%
STOB 17.1%
BKG 10.Four%
VSVS nine.5%
RMG eight.Nine%
LGEN 7.6%
GOG 7.Five%
HSBA 7.4%
IBST 6.Nine%
BP 6.Zero%
The especially big positions in ICP and STOB are historical in preference to planned; further tactical top reducing need to reduce those whilst tax allowances allow.
Long simplest funding portfolio
My lengthy most effective investment portfolio as an entire (which includes the United Kingdom shares above, plus ETFs irrespective of which account they're in or whether or not they are hedged) is built in line with the principals in "Smart Portfolios".
The outcomes here are not quite as astonishing:
Dividends: four.4%
Mark to marketplace: -three.1%
Total go back: 1.3%
IRR: 1.33%
Benchmark: 1.31%
I know for a fact many people are wondering I would were better off in Bitcoin. Clearly the ETF part of my portfolio dragged down the fairness performance (UK equities are more or less 20% of my normal long most effective funding portfolio).
I turned into a small net dealer of UK stocks, but a internet consumer of ETFs (with some net shopping for normal as I became capable of reinvest some extra capital). Generally I became a vendor of bonds and a customer of equities, as discussed closing 12 months the asset allocation version I use looks at 12 month momentum to tilt between bonds and equities (that is in part three of my second book). I mentioned inside the preceding update that equities had been outperforming bonds, so a tilt toward equities away from my strategic allocation is warranted.
Right now MSCI international equities are up round sixteen% over one year, as opposed to global bonds down around 1.Eight% so this pattern is unchanged.
I may not look at the contemporary make up or danger publicity of my ETF portfolio simply but, because it only makes feel holistically which include the fairness hedge.
Trading account
Although the make up of my trading account is complicated I handiest have best graphs that show the value of the whole thing in it, so here they may be:
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| Since inception |
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| Last three hundred and sixty five days |
The excellent information is I reached a new HWM in February; the bad information is that like the rest of the CTA universe I then were given hammered and ended up flat for the 12 months.
And right here is the breakdown (all values normalised with the aid of my notional capital at threat):
ETFs
Mark to marketplace: 0.1%
Dividends three.7%
Commissions: -zero.00%
Subtotal: three.8%
Hedge
Mark to market: zero.25%
Commissions: -zero.00%
Subtotal: 0.25%
Total for stocks and hedge: 4.1%
Futures
Gross earnings: zero.48%
Commissions: -zero.Seventy seven%
Slippage: -zero.47% (Bid ask spread fee -zero.Ninety one%, much less execution algo profit 0.Forty three%)
Interest and prices: -0.09%
FX adjustments: -2.Eight%
Total for futures: -3.7%
Grand total: 0.4%
A sea of flatness then; basically I made no cash buying and selling futures, after which earned some dividends which paid for FX losses. These FX losses aren't surprisingly huge (in context the equal numbers for the previous couple of years are -zero.Eight%, 3.2% and 1.7%); however in a 12 months with such flat overall performance elsewhere they stand out extra than they ought to.
These FX losses are essentially the MTM of non GBP cash held in my futures account. Some of this cash is required for initial margin; if I did not have this then I'd pay interest to borrow foreign currency which seems nuts. However there may be additionally a few excess cash, now not required for margin. I took the decision now not to 'sweep' this coins frequently returned into GBP, as a proper hedge fund could do, which might minimise account volatility. Ultimately I'd rather have various forex holdings, even though there's no proper answer to this argument. In the long term I basically view these FX gains and losses as noise with an expected 0 imply.
Commissions and slippage are in keeping with backtest and former years.
Some go back information:
Standard deviation of returns (primarily based on weekly, annualised): 23.Eight% as opposed to long time target 25%
Average drawdown: 6.Three%
Max drawdown: -17.2%
Worst day: -five.7%
Best day: +6.7%
Some trade statistics:
Profit aspect: zero.98
Percent wins: forty one.4%
Win/loss ratio: 1.Five
Average retaining duration, prevailing trades: 32 days
......................................, losing trades: 21 days
It's possibly instructive to review this performance inside the context of the previous few years, which includes a few benchmark figures. 'Bench1' isthis AHL fund, using monthly returns from April to March in each yr, and a brand new benchmark 'Bench2' is the SG CTA index. Both have returns scaled up to match my volatility. Remember the benchmark ought to only be in comparison in opposition to futures trading, now not the equity impartial issue of the portfolio. Also notice that the 'Bench1' fund has an express GBP hedge; so might not be as careless with cash publicity as I were.
Year: 14/15 15/16 16/17 17/18
Hedge: -1.1%, 16.3%, 14.4%, 4.1%
Futures: 58.2%, 23.2%, -14.0%, -3.7%
Net: 57.2%, 39.6%, 0.3%, 0.4%
Bench1: 106.9%, -10.6%, -6.2%, 16.4%
Bench2: -6.7%*,-21.9%, -3.8%
* From thirteenth April 2015
So for this yr at least I'm roughly consistent with the CTA index, however behind the higher acting AHL fund. This is a comparable sample to remaining year.
From any other factor of view my Sharpe Ratio seeing that inception continues to be going for walks at round 0.98; whilst for the AHL benchmark over the equal duration it is 0.86 (with out danger free charge). None of those figures are statistically significant; and I for my part could not care less whether I outperform or no longer, however it's still thrilling to examine those figures occasionally (although annually is probably enough - I do not leave out the days when institutional stress meant I had to test in on competitor performance on a month-to-month foundation or even more regularly!).
Digging more deeply it looks like the winning sectors had been Volatility and bonds; with losses in FX and Energy. On an person device level gainers had been: Palladium, BTP, VSTOXX and Nasdaq and losers: Soybeans, Gas, Korean three 12 months bonds and JPYUSD.
Let's take a look at the coolest information first; here is Palladium:
What offers? Well basically I ran out of margin head room, and because VIX and V2X have been very margin hungry I closed my positions in them. So a bit of good fortune there.
Now the awful information. Soybeans:
Holistic view of overall performance
Looking at my complete portfolio the uncooked numbers come in like this (dividing by a complete for property that consists of cash held in my futures and different funding debts):
Dividends: 4.1%
Mark to market: -three.5%
Total return: 0.Fifty six%
.... Of which UK shares: 3.Three%
.... Of which ETFs: -2.Zero%
.... of which futures + hedge p&l: -0.65%
IRR: 0.6%
Benchmark:1.31%
This is a similar picture to last year: a slight under-performance against the benchmark.
Risk exposures
Here are my current cash weights across the entire portfolio:
Bonds: 25.1%
Equities: 65.3%
Other: 3.3% (property & gold)
Cash: 6.4%
Unlike last year the figures here already show the rebalancing I did at year end; as I already mentioned this included a further reallocation away from underperforming bonds to equities.
I prefer to look at risk allocations, which are (with last year in brackets) and [my strategic target allocations in square brackets]:
Bonds: 13.1% (17%) [25%]
Equities: 59.4% (54%) [50%]
Other: 2.9% (3%) [3%]
Futures*: 24.5% (26%) [22%]
* Trading, futures hedge offsets equities exposure
Again note the tilt towards equities given their strong relative momentum. Regionally my exposures are (each row adding up to 100% of each asset class):
Asia EM Euro UK US Other
Bonds 0.0% 25.7% 27.8% 4.4% 33.7% 8.4%
Equity 13.5% 27.4% 20.5% 28.8% 9.3% 0.5%
These don't exactly match to the figures in the model portfolios in my second book, partly for historic reasons (the UK equity exposure is still quite high), partly because of availability (eg of Asian bond ETFs), and partly as I tilt towards higher yielding funds.
Some thoughts
It would be nice to make more money, so an interesting question is how? Without digging too deep it looks like my systematic UK equity trading is doing relatively okay, and my futures trading could be better. This leads one to ask a number of questions.
Does the apparent out performance of my UK equities warrant a higher allocation than a Smart Portfolios investor would give it? To put it another way what is the benefit of a long only systematic portfolio exposed to multiple risk factors, versus vanilla market cap weighted? There is some benefit, but in my book I recommend not adjusting portfolio weights too much in the expectation of higher relative Sharpe Ratio. Indeed I'm currently at around 17% of total portfolio risk in UK equities, versus the 4% or so I recommend for a UK investor in my book. If I continue to top slice my outsized positions in ICP and STOB I will still only get down to 15%. In conclusion I think it is worth continuing to tactically reduce my UK equities exposure.
Improving my futures trading is something on the 'to-do' list. Arguably it would make more sense to introduce another asset class; perhaps cover more individual equities, start a long:short portfolio, or look into options. However this will involve far more work than I'm prepared to do so I'm sticking to futures. At some point when I get pysystemtrade to the point where it can replace my current trading system I will be in a position to start looking at some improvements here.
