Happy New Year, all! Not as snappy as others to report, as my performance module needed a bit of work before I could be confident of my 2020 numbers, but here they are: TR: 27.79 ann_realised_vol: 14.22 annSR: 1.94 longest_drawdown_(yrs): 0.4 worstdrawdown: 11.03 calmar: 2.5 worstmthly: -7.37 bestmthly: 13.83 avgmthly: 2.32 skew: -0.32 kurtosis: 0.89 The vol was well below target (which is 25% like GAT's). I suspect this is because my risk overlays were working a bit too well, but I am happy with the outcome. Having said that, like others I found the pleasure of hitting HWMs did not entirely compensate for the pain of watching the drawdowns (Schopenhauer will be turning in his grave... ) Thanks everyone for the company, and thanks again GAT for this great forum and your incredible generosity of time. Good luck to everyone in 2021!
So when you convert $ positions to % of capital, do you consider signs of the price and the position, or % of capital is always positive ? e.g. if you're long 2 contracts with price -20pts*10,000$(multiplier)=200k$ notional (really negative 200k, because the price is negative) and your base capital is 100k, then your weight for this instrument is +200%? Or if you're short the same 2 contracts but the price is +20pts, it's still same result +200%? Sorry if I'm missing something (like a brain ) here.
Thinking a bit more about it, logically looks like negative price shouldn't reverse the weight of the position. E.g. suppose I bought a barrel of oil when the price was -10$, that means they gave me a barrel of oil and 10$ (they were really desperate to get rid of it ). Then the oil price went UP, so it's now -5$ and I decided to liquidate my position, so I will give then back their barrel, but only 5$ with it, and I get to keep the 5$ profit. That means my position was really long because I benefited from the price increase.. I.e. long means long, short means short, even if the price is negative. The price doesn't change the sign of my position.
Exactly. The zero line messes with one's mind, but the direction of the trade does not change. Shift the (arbitrarily chosen) zero level to -100 and the problem disappears.
yeah, only the sequence of cash-flows reverses when the price is negative (I felt something should reverse ) normally when you buy-sell you first give money then receive it, but with a negative price you first receive it then give it back, "curiouser and curiouser..."
I must admit I have never truly grasped the nature of credit risk at IB and how to manage it best. From the somewhat opaque responses I have received from their support desk, I reached the tentative conclusion that securities which sit in a margin account can be lent out by IB. Therefore any government bonds I buy through my futures trading account are not ringfenced and protected in the event of IB default (they would form the pool of liquidation assets available to all clients). I therefore opened a second cash account (assets in this non-margin account cannot be lent out) and this is linked to my futures account and from which I can easily transfer cash or securities to my margin account should this be required (my daily reporting process would send me a critical alert in this scenario). Is my thinking wrong here? Or does anyone have an opinion on whether there is a better or simpler way?
Your idea actually sounds relatively simple, although of course you're still exposed to IB in the cash account beyond government insurance limits. It's also my understanding under UK law that you remain the owner of any assets that are lent out, and therefore they are protected. But I'm not a lawyer, and I don't know if this applies to other jurisdictions. I think it's fair to say that the failure of a huge broker like IB is incredibly unlikely, and if the shit hit the fan in such a collosal way then most other things you could think of that would protect you may fail as well... GAT
Thanks GAT, I agree IB going bust would be a major event. However if protection is available and the costs are reasonable (the second if is a big if of course these days) I believe it is still worth securing some of it. IB failure shouldn't after all impact repayments from sovereign borrowers. My paranoia on credit risk management has become more acute recently due to IB migrating my account post-Brexit to Ireland who offer all of 20K as government insurance. Just to be clear, when you said 'that's quite a high cost to purchase insurance against IB going bust!" in the original post are you merely attempting to protect your assets up to the government insurance amount? Is it your understanding that government insurance only applies to securities and not cash? Its quite possible I misunderstood the point you were making.....
The government only insures cash, up to 85K. So let's suppose I have 385K in cash, of which 200K is needed for margin. So I have 300K of cash which is unisured. I need to keep 115K of that for margin, but the other 185K I could use to buy say ETFs. This would mean that my counterparty risk is now with the ETF provider, rather than against IB. In the simplest possible example if I could buy a 0% return money market ETF that cost me 10bp a year in fees, then 10bp is the cost I'm paying to transfer my credit risk away from IB against the ETF provider. If the provider is Vanguard or Blackrock; well that's probably about as safe as I could get. (I may also benefit from being able to claim another 85K in insurance against the ETF provider, but it's not clear if I could do that in practice) GAT
This is exactly what I am planning to do. Using account values as given by @globalarbtrader my current system would use a volatility target of 385k*25%. In order to move cash away to another account where I hold ETFs I would need to modify the risk percentage (25%) such that the cash volatility target remains the same. For example: if I change the percentage from 25% to 40% I would need to change the account value from 385k to (25/40)*385k = 240k. 385k*25% = 240k*40% = 96k. Thus move 145k to another account. The remaining 240k would still be sufficient for the margin requirements. I can use the 145k to invest in ETFs, and, if these ETFs have low volatility, the combined volatility would be similar to the current situation.