Not exactly, Mr Hegseth. What I am saying is that there might be an intrinsic risk on/risk off structural change that took place a while back and has accelerated with time which means that many of the markets in the portfolio have a strong response function to moves in (US) equities. Not a bad prior given the massive growth of US equities as a share of global markets.
A related question you could ask yourself is - if this were true why isn't your portfolio construction/risk framework picking this up? Do you have more equity risk than you think? I usually compute a beta of my portfolio to the S&P500 on every rebalance and see if it makes sense.
Agreed. So this is something I also get my backtest to generate amongst other things (but I don't always pay attention to it).
So I have this view that I've tried to articulate before that there are usually just a few big macro factors out there which our trend following picks up on via the imperfect expression of individual instruments. It wouldn't surprise me to see this sort of correlation against what is a relatively pure factor 1 (S&P 500 quite a good proxy for global equity risk on); even in a portfolio with no equity indices you'll get something so it's hard to eradicate entirely. Rob
100%. So many ways for equity like risk to creep in from other assets - FX Carry, Short VIX etc. FX trend right now looks just like a carry portfolio. BTC futures trend also are pretty much like levered equities. Eliminate all risk factor exposure and you cant make money trading risk premia... why is life so hard!
I spent the last week retooling my database. I finally took the plunge and bought a NUC PC (ewww) so that I can switch to CSI UA - so I now have a massive range of futures contracts that I can potentially trade if available on IBKR. I added Malaysian Palm Oil, Emissions, Rotterdam Coal and Dutch TTF to my program. Dutch TTF will sadly be too hard to trade as their minimum lot size is a tad problematic for my account size. What other contracts do you guys trade other than the super popular, ultra liquid stuff that every big CTA trades?
Nice, welcome to the addiction of playing with UA and markets. I found the choices for Coal were all illiquid currently. Note that Dutch TTF is similar to UK Natural gas, but UK is even larger and harder to trade. They both tend to do well in my backtest, so I'm using TTF. If you end up using NGL at some stage, you need to shift the Decimal point across 2 places with CSI data. The same with Japanese Yen, depending on if you get your ticksize/point/decimal information from CSI or somewhere else. For commodities, besides what you mentioned here's a few of the markets I added that are less commonly talked about though some are still very liquid (like the Euro versions of common markets): STF - Rubber @ SGX LSU - Europe Sugar LRC - Europe Coffee (Robusta) LBR - Lumber ALI - Aluminium HRN - Steel (not usually liquid enough lately) SEF - TSI Iron Ore @ SGX HH - Last Day Nat Gas is there but it's 95% correlated to NG depending how you setup the rolls LGO - Europe Gas Oil BL2 - Europe Milling Wheat COM - Europe Rapeseed/Canola RS - US Rapeseed/Canola EMA - Europe Corn Other than that, there's a whole world of financials. Eg JG2 10 year Japanese Bonds have been uncorrelated with other fixed income lately and has kept performing well as a short while my Western market bonds have had started losing. Some have expensive commissions eg Korean Bonds due to small size contracts, or due to requiring monthly rolls eg the SGX Currencies. Quite variable the trading costs on these Asian contracts. Almost forgot Australian bonds - us Aussies are very special We don't price them the same as the rest of the world, the rate has an effect and you might need to research more to understand. The other thing is IB requires actual cash to trade them, not just excess liq/margin. If you get any execution errors, this could be why. I was stumped after I had a bond position and my stock system failed to place a stock order and got a Sydney futures exchange error. It was because the stock order would have left me with no cash, no other market requires this when using portfolio margin and I usually hold TBills instead of cash. Not sure if this regulation only applies to Australian accounts but it was a hurdle getting Sydney futures going. I've been going through an exercise lately of setting start cutoff dates on a lot of these less common CSI markets - where the data/chart is poor and illiquid it has given unrealistic backtest results so I'm trying to cut them off and see only where the data is good enough. CSI automatically links some old markets together with new markets, so the liquidity filters don't always pick this stuff up depending how it's done.
Thanks. This is so helpful. I haven't got any trades on at the moment on this but CSI tells me the avg C1 contract volume now is ~200+ Yes - I too found it helps the sims - shame about the minimum lot size. Also I am all for diversification/free lunch and with the rise of geopolitical risks, energy markets in Europe and USA could be doing very different things. I will look to add some of these. Do you have a strategy to decide which assets to add to your universe? For example - capital is limited and a lot of risk is along big factor trades. So ideally you want to forecast and trade a bunch of things that are very different from each other. For example e.g. For European equities I choose to trade only the eurostoxx contract instead of France, Germany etc separately. In my view adding a less correlated asset makes more sense than adding a multitude of very similar things. At what stage do you say I will exclude highly correlated commodities e.g. Brent/WTI or pick between US vs Euro Wheat etc. Even in FX most of the action happens in carry currencies - once you have AUD, CAD, NZD does adding Mexican Peso really give you that much more? There are diminishing returns to diversification. I always struggle with this - because I don't just want to end up picking assets that backtest well. All good points - I didnt add JGBs as for a long time the market was 'artificially closed' with YCC and had an unrealistically low volatility. Things could be different now. Again I view developed govt bonds as a single factor trade - the big trade was always riding the long yield cycle as opposed to doing one country against another. Korea could bring something different.
I'm not familiar with the C1 symbol - since you mentioned 200 avg volume I assume you mean CSI symbol RCQ, I believe this matches to ATW symbol in IBKR. Looking at IB volume history it ranges from 15 to 140ish for March. However Barchart reports more volume than that https://www.barchart.com/futures/quotes/LU*0/futures-prices?viewName=main&timeFrame=daily I've never traded Coal yet, maybe there's a different contract I'm missing? Anyone know how to explain the difference between IBKR volume and barchart? I always try to add as many futures as possible, and let the system to decide whether to trade it or not based on rules. The exception being if something is illiquid now, or illiquid in the past and has bad price history only because I don't want to use up all of the 150 market limit CSI enforces. I do have both Brent & WTI, but I didn't add both WTIs as the European version of CL is pretty much exactly the same in USD as well. Brent and WTI correlation can go down sometimes to 0.9 but most times it is 95-98%. If something is denominated in a different currency I will add it though, as it slightly changes the price series. Especially if the contract trading times or expiries are different. E.g. London Cocoa goes from 85% to 95% correlation. If it's enough to give me different entry and exits, then my return from the two markets has a much lower correlation than the two markets themselves. Yeah I could never pick based on the backtest, that's how some people missed Cocoa. Easy way to avoid that is to add all markets unless they are exactly the same (like both WTIs), illiquid, or have a correlation rule even if you run the correlation after adding them. For the European Indices, one example recently the Euro Stoxx Bank Index was chosen to go long. Even though it is correlated to other European indices, the indicator to go long was stronger so it got first entry, and the performance is slightly better. If any other correlated European indices trigger after this, my strategy will reduce their entry size based on correlation, or even skip entries if I have too many. In that way it takes the first/best markets. This is just my method, not the "best" method. I'd say mine is different to most in this thread, as it's more classic style - I don't adjust positions that are already open until they get an exit rule or get stopped out. Correlation sizing reduction is only a very small change at entry, and position skipping is rare it's just a backup in case entry rules aren't strict enough to prevent too many positions eg if we hit a stronger trending period than history ever saw in the backtest. The other thing I do differently is have a size multiplier based on how many correlated markets in a group, e.g. Indices will be sized smaller than Softs, because I have 3x as many indices. My idea is it's preferable to have multiple semi-correlated positions at a smaller size, than to just pick one out of them and put all the risk into that just in case they diverge after the position opens. Keep in mind I've only been trading the system live for 3 months, so take all this with a grain of salt and look into how Rob and others are doing it with market selection, correlation etc if that is your goal. Yeah I see a lot of correlation with Western developed bonds especially within Europe. The Asian markets are different though. Gilt has been painful for example, reversing and stopping me out all while JGB keeps going down and making money. Not sure if this is a short term correlation divergence or not, I haven't checked the correlations manually on these.. just my experience over the last month watching the positions.