Acceptable Max DD?

Discussion in 'Strategy Building' started by Corso482, Jan 22, 2003.

  1. man


    There were several post referring to mine about risk-return of trend following and daytrading strategies. I actually didn't get the point of the critical voices to be honest. But I would like to make my point clearer.

    I've been trading trend following and short term strategies and saw quite some other people doing it. Looking at long term track records of pure trend following CTAs I feel that you usually come near to the 1:1 figure of return and draw down. I am talking about net of fees and not multisystem. This 1:1 is a conservative figure, but a "rule of thumb", as asked for by the initial poster, should contain a cussion IMHO. When I refer to trend following I am talking about system with 1.000 roundturns per million dollar per year.

    In short term trading (but futures only), I think you can do "much better" than this. Trading about USDm 30 in such thing we came to figures of about 3:1. All calculated for clients, meaning net of management and incentive fee. (Sorry if this was the issue - I am most of the time thinking in "net of fees"). These short term strategies required about 8.000 roundturns per million dollar per year.

    The problem with short term is the cost of maintaining the operation (commission, trading desk etc) in time of non-performance.

    sounds like you are doing far better than me. What are your figures (please include if net or gross)? With how much money (which is a critical issue)? Would you mind giving some idea of what direction you are thinking of when you say "real research"? I am honest in this: if "real research" means better results than I am eager to learn about it.

    If you think I am talking about 2n or 3rd hand information, please provide 1st hand.

    I do not want to argue. I think I was not too clear in my post, which induced some misunderstanding. I assume we are not talking about the same industry segment, I referred to trend following in futures on a pure quantitative approach.

    #31     Jan 27, 2003
  2. man


    Please look up the results of a trend folowing CTA, who is very high in international rankings to check my former comments.

    I calculated average annual return and maximum draw down by means of log returns. My result was a 23% annual return and maximum draw down of -22%, all done on a monthly basis.

    Several thing so be mentioned:
    1. Quadriga is No1, so not a real substitute of the average trend follower. This would indicate that the average trend follower would not do as well as this example.
    2. It is only monthly data, thus the max draw down would be substantially higher ( I guess near 30%), while leaving the annual return rather unchanged (we had already more than 80 data points). This would indicate that on a daily basis the relationship between return and draw down would be worse than 1.
    3. fees are already deducted. this is the major point. Since Quadriga charges average fees of I guess 4% for management and 20% as incentive, the performance number would grow to mid thirties. The MaxDD number would decrease to maybe 20-25% on a daily basis.
    4. Quadriga manages about USDm 500. This should be a burden, but from their chart you would not detect decreasing profits.

    Taking all this into account, I would see Quadriga's system gross (before fees) at a return of about 35% and a maxDD on a daily basis of about 20-25%. This would indicate risk return figures of 1.40 to 1.75 for the world champion.

    My conservative guess for the average of about 1 does not seem to far away from that. Please correct me, if I am wrong.

    #32     Jan 27, 2003
  3. DT-waw


    Crabel Diversified 1x leverage has better return/risk figure. 12.05% annual return and only 4.24% worst drawdown. Ratio of 2.84. I don't know however, if these figures are net of fees.
    #33     Jan 27, 2003
  4. man


    I completely agree that Crable's figure is better than Quadriga. Hence Crable is trading short term, not typical trend following. I would say your post is in line with what I tried to say.
    But note that he will have significantly higher trading expenses...

    #34     Jan 27, 2003
  5. DT-waw


    What kind of trading expenses are you referring to?

    Here're more CTAs with great return/max DD ratios:

    Now, if you build a portfolio of funds, max DD can be even lower. Key thing as always - diversification. Short term strategies have one important advantage over longer term strategies: they profit from more market's inefficiencies, more frequently.
    #35     Jan 27, 2003
  6. man


    1. three things: commission - slippage - trading desk
    most important, even for a private trader is commission. High frequency = short term trading must make significant return to be break even. slippage can be a factor depending on the market(s) traded. a trading desk is an issue once you want to handle more money in many markets simultaneously.

    2. most of the people on your list are not CTAs, non is a quantitative trend follower. Risk return features become a completely different issue once you are talking about different hedge fund styles, like convertible arbitrage, merger arb. or fund of such funds. I know people making 10-15% p.a. and only once ore twice experiencing a loosing month of minus one or two percent in almost a decade.

    Do not forget that past performance bla bla bla is very true in some cases and can distort the normal return/risk point of view. Early 1998 I saw a fund with five years track record, 20% annualized return and no downmonth. Five months later out of business. Traded emerging markets debt. You could not tell from the numbers ...

    #36     Jan 27, 2003
  7. DT-waw


    I agree. You must look for strategies that are profitable including slippage & commissions costs. So you can throw out of the window most of the day trading systems...

    Diversification over different trading styles is a good thing. Trend following, arbitrage, discretionary; all of these can be profitable; and more important: can be profitable (and have drawdowns) in different periods.

    Of course. No guarantee.
    #37     Jan 27, 2003
  8. DT-waw


    #38     Feb 12, 2003
  9. JESUS H. CHRIST...And they're managing over 140MM dollars!!! What is this evil entity called the "IIG Trade Opportunities Fund"? Is what they've done even statistically possible???:confused: :eek:
    #39     Feb 12, 2003
  10. Corso...of course it's possible, they're not aiming for the big win, they're trying to be conservative and consistent. With this strategy, don't expect high gains but volatility is usually low.
    Everything is possible, you just have to aim for what is statistically more likely.
    #40     Feb 12, 2003