Fully automated futures trading

Discussion in 'Journals' started by globalarbtrader, Feb 11, 2015.

  1. You mentioned you own cash equities too and trade that with a hedge on? How are you trading stocks? Value related? I'd love to hear how you (would?) approach equities in general as big CTAs like Winton are running some sort of value momentum strategy. The last time I did some research, stocks and TF strats are good compliments to each other.
    #201     Dec 11, 2015
  2. I trade stocks with a very non quant approach (essentially value though). I basically buy things that look cheap on a number of metrics, and then hold them forever, with very occasional selling to optimise capital gains tax.

    Yes in theory long:short cash equities would complement trend following quite well, and AHL / Winton / Systematic et al all have a program like this in their multi strategy funds.

    Running a proper equity strategy would be quite a lot of work, and also it wouldn't make sense in cash equities as they're too expensive in UK retail space; I'd need to look at spreadbetting or CFD's.

    #202     Dec 12, 2015
  3. Raphael


    This is pretty interesting. Any reason you're selecting individual stocks versus just buying into an index fund?
    #203     Dec 12, 2015
  4. History. Back in the day, I only traded individual equities, UK only. This was before ETF's really took off here, and I'd always been interested in equities right from when I got interested in finance around the time of the dot com thing (funny that). Then once I was working in a CTA I couldn't have traded futures if I'd wanted to because of the compliance restrictions, which also frowned on trading too often.

    It wasn't really until about 2008 that I started getting into ETF's, and even then . So I have this legacy of a large chunk of individual equities that I can't sell without incurring a massive tax bill. Very gradually I'm selling it down and going into ETF's. So now my asset allocation in my long only investment portfolio is 1/3 individual names, 2/3 ETF's.

    I used to enjoy the process of stock picking even though realistically, I wasn't that good at it (I think I slightly outperformed the index, for a lot more work). Now it now longer interests me, as I guess I've moved gradually to being more interested in the macro world, and I've also gradually realised that you'll get better performance from a broadly diversified portfolio rather than one heavily dominated by stocks from one country (definitely on a risk adjusted basis, probably on an absolute basis too).

    #204     Dec 12, 2015
  5. Thanks for the reply.

    You mentioned in your profile that you mainly focused on fundamental strategies during your tenor at AHL. How do these strategies usually work (ie what variables do they look at)? There's a lot more about price based systematic trading compared to fundamental based macro models...so I am more inclined to hear your experience in that area. What are the typical sharpe ratios and returns and how do they compare from a correlation perspective with price based systems?

    A few more questions I had Is from the following slide which provide a good overview of what I think is the evolution fund (which you are part of I presume)

    1. How do OTC markets differ. What advantages do they offer? How can one get access to these markets? (I know it's nearly impossible, but entertain me assuming I have the money to trade those whatever that amount requires)

    2. Option selling strategies have large negative skew. But in your experience would a portfolio of diversified option selling strategy work? I'd love to hear if your thoughts of volatility it seems like such a good diversifying return stream.

    Apologies for the long questions. I know you can probably write another book on those but it's not everyday any of us get to interact with people of your calibre.
    #205     Dec 12, 2015
  6. Flattery will get you everywhere

    I spent 4 years doing that (Formally its global tactical asset allocation.), and then 3 years on the fixed income side.

    Mostly it was taking ideas from economic theory and trying to apply them. So for example you have things like PPP in currencies (google it if you're not familiar), taylor rule in interest rates, cochrance-piazzesi in bonds.

    Then you can also use classic value indicators but aggregated. So for example you could buy cheap PE countries and sell expensive. Although differences in accounting, taxes, and systematic investor biases mean things can stay expensive a long time (think Japan). Ideas like Shillers PE are interesting.

    You can also look at value across asset classes, eg the Fed model. Although you need to add inflation and a few other things to it to make it reasonable.

    A lot of these things are correlated with carry. For example bonds tend to do well when the yield curve is steep. But a simple carry method will give you the same answer.

    Holding periods tend to be long, so sharpe ratios lower (well below 1.0). In isolation you wouldn't look at these things twice, but they do add something to a basic technicals + carry model. But there is a lot of work involved in building them, and then in getting clean data. So it's something that only an institution would probably bother doing.

    There is nothing special about OTC markets, but diversification across geography and assets is a huge advantage; and many places can't be got to except through OTC instruments. For example if you want to bet on interest rates outside the major economies you have to trade swaps; there aren't liquid futures.

    You need to find at least one prime broker who will clear you, and then setup relationships with other people you want to trade with. You need to hire a back office who understand about things like ISDA agrements, and who will make quarterly interest payments.

    The exception of course is spot FX; where if you don't mind massive spreads and crap execution there are plenty of people happy to let retail traders play in this largest of all OTC markets.

    Yes it will work. Anytime you're going to take on an insane risk you should expect the market to pay you for the privilege.

    Just selling vol will always make you money, but you can improve things somewhat by delta hedging (using a method that understands ), and only selling vol when it is worth your while (when markets are range bound and implied vol is expensive). Such a strategy will have a sharpe around double what a trend , at the expense of much higher skew, but will not have the life threatening drawdowns of plain vanilla option selling.

    This is an old colleague of mine:


    If you click on 'references' there are links to enough academic papers to enable you to build a very nice option selling strategy.

    #206     Dec 12, 2015
  7. nemo4242


    Questions about the Carry rule described in your book:

    When trading a contract further down the road e.g. the Dec 2016 corn, what do you use for calculating the raw carry? The previous contract, e.g Sep 2016? Or the front month March 2016?

    When the spot price is easily accessible, e.g the S&P 500 index for the ES, do you use the spot price or still the next month contract?

    #207     Dec 13, 2015
  8. With Z16 I would use U16 for carry

    For Sp500 I use the next contact - but spot is better if you can get a synchronised price.

    #208     Dec 13, 2015
  9. nemo4242



    Ah, that is the problem: Because of different trading/calculation times you don't get easily a synchronized price.
    Didn't think of that.
    #209     Dec 13, 2015
  10. Yes that's why you should use end of day prices of futures to calculate carry even if you trade on intraday prices
    #210     Dec 13, 2015