Prediction. There is more than one way to skin the trading cat, but for some of us, this is a great quote: https://www.youtube.com/watch?v=kHawmZbapjU&feature=youtu.be&t=117 I heard this guy's nickname every day at work a couple years before this was filmed.
This stuff is actually kind of easy if you start to think like he is saying. The funds use strategies with multi-level risk controls. So they are spreading related instruments (controls the vol distribution), allocating across many products/spreads (to reduce the PnL correlation) and utilizing secondary risk controls like playing with the weightings/trade duration (variance and timing of the PnL). [and so on] It's not really easy but it's also not rocket science. However, this isn't the style that everyone should necessarily be trying to cultivate. This is the type of stuff professional risk managers have to do. Like he said, they have to compete (with other funds) and this stuff demonstrates robust scalability. In other words, they are ready to grow the AUM. Personally, I would much rather just build a really good strategy, and trade it with my own money. The type of thing where you can retire in three years. Also, this is one of the (many) reasons why a lot of guys prefer to stay independent, and not mess with OPM.
True to some extent, rest all this is quite subjective. You never know, even a newbie can be very good at managing money sometimes.
A newbie trader lacks respect for the market, and underestimates the outcomes. A professional has every angle covered, and can still lose money. They embrace the uncertainty (win or lose).
That's the good news. Not really. What takes the majority of the time? Is testing a new Program. Once you have it? It's usually ridiculously simple. Or at least it should be. But the testing process of a new Strategy? That's a beast. I've been working on one new Program we'd like to use? For the last T W O Y E A R S . We've finally begun to move into live sample testing, which can take another three months. Maybe longer. But when we have the Program? It's so simple to run? Like I said, my 19 year old nephew could run it by himself, inside a month. Honestly? Though I like a Partner to help me run the Portfolio? Conceivably, I could do it myself, for the above reasons. Each strat has to be ridiculously simple to implement, because we do not trade Black Box, but instead, Grey Box. Meaning the human has to input and manage the trades. And everything about the process has to be simple. The Multiple Market Strategy I mentioned at the outset? I only have to look at it once a month. I don't even have to manage the thing. Look at ABC at the end of the month / beginning of the month? If it needs adjusted (which it only needs adjusted once every three months on average, and all of the pieces moved) ... then adjust it. If not? Then let it run into the next month. So that one is literally something that might take me 10 minutes a month. Simplicity is key. There are other programs / strategies we have, that yeah, to run it? We have one thing to do every three months. Others? One thing to do once every six months. Others? I have to monitor those positions every day. But since I don't have to worry about the 30 day processes ... like ... at all? I don't have to sweat monitoring them. Another little insight for you. So much has become simplistic as to Firms? There is a household name out there, legend really, from the 1970's on. I think he's since retired, but the Firm is still going. 5 BILLION under management. You know how many guys work for them? Five. That's it. And honestly, before he retired? He did most of his work from home. The only part that I dread? Is what I've been tied up in now for two years? Program / Strategy development. Some guys love it. Not me. I just want to run them. But, to reap the rewards, we have to put in the work ...
Well, you might enjoy the post above ... in that we spend less time in actually running the strategies. All the time, is spent in development. And remember, it's the strategies themselves that are "diversified". People hear of running investments where the stocks are "diversified", so they have a Railroad, a Technology company, a Healthcare company, etc. Stocks that are diversified ... or ... as we say ... non-correlated. However, as they are all the same asset class, namely, stocks or equities ... when the market as a whole takes a dump, they find out that those non-correlated stocks become correlated to one another, very quickly. LOL. Not that I'm bagging on individual stock names. I'm not. We actually run a very small portion of our book (Only 5% of the total portfolio is exposed to that strategy. Actually, now ... a little less than that), that has exposure to Intrinsic Valuation plays. Only buying on deep pull backs on a 10 year periodicity from an Intrinsic Valuation basis. So I'm not bagging on that approach at all. But in my usual way ... I have made a short-point ... longer. LOL. Anyways, my point is, you've heard of non-correlated, or a "diversified" portfolio of stocks. The reason people do that, is so that if one is suffering, the others, in other sectors ... are not. Sensible (until the aforementioned broad market sell-off). Well, all we do in my space, is run diversified strategies for the same reason. The strategies themselves? Can be simple. I'll give you an example of two non-correlated strategies, super simple. I don't use them myself, but if you tested them backwards, you will see that A) They don't take much to run them? B) Backtested history (with the problems therein) they beat the S&P 500 by orders of magnitude. My point is not to talk strategy. Though we have this in our library, we don't use these. But my point is just to illustrate the above concepts, with an example. Don't worry, I'm not breaking any NDA here. My partners and I have decided the following simple example is something we can use ... as just that. An example. And doing so helps 'de-mystify' what we do, which also helps to work against the "demonizing" we so often see in popular Financial Media streams (which is usually 1,000% wrong). 1) A Long-Flat Strategy. Each month, at the end of the month? Check a monthly chart of the SPX. Is above or below it's 13 Period EMA? If it's above the 13 Period EMA? You are LONG whatever your capital (with good Margin to Equity) allows to you to be long. In other words, if you have $125,000? You can think about being long 1 ES. Knowing that you might have 20% DD's (a crash), and you'll simply have to endure that. But if you only have $3,500? You might be long an appropriate amount of SPY. Or maybe you are in between those amounts when it comes to capital, and you can be long an appropriate amount of Micro E-Mini's. There are a million SPX products out there nowadays, so whatever one your capital allows you to be. But you get long, and you STAY long for that ENTIRE MONTH. You don't look at it, and you don't 'tweek' it. If it is below the 13 Period EMA? You are FLAT, and you take that capital to straight cash for the entire month. You run that backwards 40 years? You're going to find it PRINTS money. Needs very little time to implement. Destroys the S&P over that time period. Has difficulty in time periods like 2015, where it HAS to undergo a bit of chop (every strategy has drawdowns). The critical thing? Is making sure that the instrument you use is APPROPRIATE to your level of capital. But it doesn't matter if you have $3,000 or $300,000. You can find an APPROPRIATE instrument to use. Be it a couple of /ES contracts? Or some SPY. Seriously, there's a little homework assignment for you. Backtest that. By hand. Go back to say, 1998, and work out how that strategy would have worked out for you. Doing that? BY HAND? It will do something else for you, that too few new traders do. BUILD YOUR CONFIDENCE LEVEL It's vital to have confidence in whatever strategy you decide to use, so that when it undergo's it's inevitable drawdown (as every strategy must), you don't style-drift, and do something that I refer to as "Method-Hunting" that a lot of aspiring traders fall victim to. To have that confidence? It's good to know your data, as to how that strategy has performed in the past. So the next question? Is looking for a non-correlated strategy. In other words, a strategy that looks NOTHING LIKE the above Long-Flat Strategy (that you will only be looking at once every 30 days, and thus, not spending a lot of time on), and should do well, when the S&P 500 Long-Flat Strategy is not. Let's look at a strategy, that many other's do, and is somewhat similar to a Covered Call Strategy. Only better than a Covered Call Strategy. At least, that's my personal opinion. And I'm not the first to come up with this. I think another Pro around these parts said it ... that this strategy is quite common in some Geographic Markets. 2) A Permanent Bearish Strategy on the Markets. Do you see how this is "Non-Correlated" to the strategy above? In one, you are long or Flat the S&P 500 Index, and that strategy in itself does well enough. In this strategy? You will ALWAYS be short the market. Non-Correlation of strategy. One strategy is doing one thing. One strategy is doing the other. Again, there are so many products out there, you have to choose what is appropriate for your capital, and weight it appropriately to the above strategy. This is math each person must work out for themselves and their situation. Be it SPX Calls. Or QQQ Calls. Sell OTM defined call spreads. If a person can afford to mess with the SPX? Selling 5 Delta SPX Call Spreads with 30 point backstops (So, for example, selling 3000 SPX Calls, buying 3030 SPX Calls to define the risk). If the Delta's get up to 20 Deltas? Roll the position to the next week (Rolling being closing down one spread, not the loss between the credit taken in, and then the loss. Note that, and then sell NEXT weeks' CLOSER to the money, to make up for that loss, and just a little bit over that) Sell enough contracts, to offset the long-flat strategy. And sell them regardless of what is going on with the other strategy. So you sell them, EACH AND EVERY WEEK. If the Long-Flat strategy is Flat that month? STILL SELL the Call Spreads. But maybe a person can't afford the SPX. Simple. Just adjust it to do it on something like QQQ. Sell 15 Delta QQQ Call Spreads each week (Liquidity is there now on the weeklies). Roll if the Probability of Touching ever gets to 30% Probability of touching (Again, for those not familiar with Options, you close down the spread, and take a loss. Then note the credit you took in, and where your loss is at. Then sell the next week, a LITTLE closer to the money, maybe vary the strikes to bring in MORE credit than you lost). With the QQQ, you might be rolling and defending a little more often. But by definition, if that's happening? Your long-flat strategy should be making you money. So all of the above is a way to illustrate the concepts I had in previous posts. And is a way to illustrate what we do. We don't do the above, because we have to worry about scalability. But the concepts are sound. The only difference with our strats? Is we think ours have a bit more "posh", in that honestly, we do have the time to focus on more complex, higher Sortino Arbitrage strategies. But what we do, is very similar to other multi-strat firms. It doesn't have to be complicated for you to make a LOT of money, as a stay at home retail trader, destroy the S&P 500 returns. All you'd be left to do with the above? Is really just monitor your deltas and roll when you need to.
The only other thing I would add to the above? Making sure the ratio is correct between the above strategies. That takes a bit of work. In other words, making sure your capital is appropriate to the instrument you will be using (1 Micro ES or the #ES or SPY) in case of a 20% pullback INTRA-month. Then making sure the capital is appropriate to your defined risk short premium strategy, when you have to roll. And then, making sure the number of spreads your selling, is appropriate to the long-flat strategy. Only takes a bit of work. There are drawdowns. But work out the math for yourself, and you can see what the above can do. And remember, my point is not to discuss strategy, and what you should be doing. But rather, how easy multiple strategies can be. The advantage of running multiple strategies. And how quickly you can get ahead, and start producing superior performance ... without a TON of effort. As a Currency Trader I knew years ago liked to say: Make sure you have good ROE. RETURN ON EFFORT!
Well ... you have to realize ... No matter how I answer that question? it's not going to end well for me here. I say: "Yes, by orders of magnitude" ... and a bunch of yahoo's will be asking me to "prove it", and I get wrapped up in that whole ridiculous nonsense for god-knows how long. When in truth, one of the best things about doing what I do? I don't have to prove it to anyone but my partners. And everyone else is just a headache. Or even a worse scenario? I say: "Yes, by orders of magnitude" ... and some moron on here accuses me of advertising my Firm for outside clients (even though I'm anonymous here, and no one knows the name of the Firm), and tries to figure out how to Dox me, and then I'm accused in front of a regulatory agency. I say: "Meh, I'd prefer to leave my performance out of it", and probably the same group of jack-muppets is going to be saying that I probably can't beat the market, or I'm a fee monster asset-gatherer ... and then I get wrapped up in THAT nonsense for just as long. There's just very little upside and 'reward' on that "trade" for me. If anything, I'd ask that ones just test out the ideas that I present to them. Not sure how long I'll last on here anyway. As the first couple of posts show, I only really found this place, because I was research Jack's project of Fund Seeder, and looking for reviews for those that used it as we now are (since about that day) ... which is free analytic tracking. We use it for that, to double-check our own math. Besides, if Fund-Seeder ever gets our Clearing Firm on their read-only status, we can then use it for presentations of our work, as it's sort of free third-party auditing. Regardless, that's the only reason I sort of stumbled into this place. The headaches are already mounting, and I have to focus in on this research project of mine. Now hopefully? I've lost the interest of a bunch of the nit-wits by this point in the post. Although there is very little upside for me? To answer your post ... Yes, we beat our chosen benchmark, which is the SPX, by orders of magnitude. We are around 17% Annualized, with a Maximum Drawdown of -2.90%. I could post the Fund-seeder stats ... but meh ... that's for our internal use, and it's only been tracking us since September 23rd, and that's not enough history. Yes, it's beating just about everything out there. But anyone could have a 'one off' for a month, and do well. That's just not enough history to truly demonstrate the skill of the strategies. However, that's not the trick. Nor are we unusual. Once you figure out the tricks of the trade? I know of a lot of guys that can do the above. The real trick? Is scaling up. Being able to do that, PAST $25 Million. Up to $25,000,000 ... and it's not as difficult. After that level? It becomes increasingly difficult as certain strategies people may use scale out of the markets they are using. Thus, my research project. Coming up with an Arbitrage Strategy, that can scale up to at least $500 Million. And why I've been spending two years, on trying to figure out a solution. Because it's a nightmare of a problem.