Can I ask a potentially dumb question? Why is it not possible/not a good idea to go long-short on futures with differing expiries, and just earn the carry? You'd need to lever up to earn a return, but I expect said return would have a very low volatility. Do people do this? Where's the unseen risk?
If I understand you correctly, you are talking about going long/short a spread and earning the carry of the spread rolldown. This is effectively second order carry and is less volatile than the rolldown of the outright future, but to earn an equivalent return you need to lever by much more. Even if that was a profitable thing to do, I don't believe span margins allow the requisite leverage to retail traders to make this work. At an institutional level, it is slightly different due to credit lines in OTC markets, and as far as I can recall there wasn't much in it in terms of relative sharpes after the beta multiplier between spot carry and spread carry. Unless there was some stat arb between the short term and long term shape of the futures curve. I also recall these stat arb trades did work well for a while until everyone got into them, and then of course they went south quickly, because liquidity in spread trades just could not support the weight of money.
Well that's exactly right. I'm trying to design portfolios have that perhaps have lower returns, but tend to post positive returns every year, while softly limiting myself to futures as an asset class. The only options I've got so far are: Shorter term trading (though I haven't been able to make much work with daily trades on futures). Stat arb on futures - things like sp500-hang seng or something like that, but tricky to execute. Arb on the spread, to hopefully isolate just carry (as above). A type of Bridgewater 'all weather' type portfolio, which is embellishment of the 60:40 portfolio. Each one of those would probably take me months to investigate, so I'm not sure what to attack first (although I'm leaning towards all-weather because I can knock that up quickly). PS current trading results are -27% from HWM on 25% vol.
To be up every year would require a Sharpe 1.5+ strategy. You will not find any of those by asking around unfortunately.
Achieving that Sharpe with daily strategies is possible (and with intraday trading maybe even up to 2-3 sharpe). But like you brought up, the trick is all in the execution/details. Strategies that are under 1 Sharpe are easy to find in the public domain (such as GAT's trend and carry signals or other alternative beta stuff), but ones that are higher than that are much more closely guarded and probably worth multiple millions. The best thing you can do is to build a framework that lets you backtest strategy ideas quickly and rapidly innovate and iterate. It comes down to eliminating bad ideas quickly. You say each of those ideas would take you multiple months to test, but for comparison I can probably go though each of those in less than a week using my system. Try to design a flexible framework that can let you do that.
Can you let us know what is the other low lying fruit (smart beta) stuff that works please? Don't seek to make millions but just achieve rules diversification as GAT always advocates