There is a graph of open positions over time in my early today's post. Re market neutral - as much as I can make it, yes. You can see an example in my previous post here. I had my longest winning streak while market was all over the place. It actually continued and ended up being 18 days.
It would surprise you, but in a professional setting (i.e. running a fund or portfolio at a fund) absolute PnL matters a lot. There is a lot of capacity constrained opportunities out there which is just not worth the effort unless they hit some sort of a PnL threshold.
Right, as bottom still line matter in anything we do. Can't just comfort ourselves continuously saying - just need to keep doing the right thing and end up with nothing after years. But, especially in professional setting, who needs PnL while taking risks like LTCM? Isn't it risk first for you guys and then capacity, and then PnL? Val
Yes. In the end, every trading opportunity is a tradeoff between the expected risk-adjusted PnL and the labor involved. Which means that anything requiring more work (e.g. anything manual) would also require more dollars on the other side. E.g. I'd be ok having a fully automated strategy that makes 500k/year and does not require me to add any new exchanges/products or manual labor, while any additional bit of effort will start pushing this number up. It's a tricky combination that really depends on your mandate and on the overall direction of the fund. PMs at bigger multi-manager funds are very risk-centric because that's what blows them out, while people who are running a specially mandated vehicles might be much more driven by capacity. Overall, it's good to think of any portfolio as a triangle with 3 corners - capacity, safety and sharpe. Up to some reasonable limit, you can increase one (to some limit) at the expense of the others. If you are mostly running your own capital, you'd probably want to maximize safety and sharpe, while if you are running mostly institutional money you probably would push for capacity and safety. There are plenty of examples were funds decided to lean towards capacity and sharpe, resulting in some spectacular blowups (LTCM is the most known, but the vol spike during this March has create a share of these too). Celebrity funds like LTCM or Paulson are rather unique. Most smaller funds have to compete for AUM and the combination of risk/sharpe/capacity matters a lot there.
Hi, newbie here! I find your thread very insightful though most of the materials look a bit advanced to me. May I ask how you handle earning events? Say a stock comes up in one of your systems but is going to announce earnings in couple days. Do you filter it out?
Happy to hear that. No special handling of earnings in any of my strategies. When I test an idea I try to generate thousands trades over 5 years period. So earning impact smoothness out. Also, with stocks in general you want to ask yourself - why would you filter out earnings to begin with? If the answer is to avoid extra volatility / an unusual loss due to a gap then it is an illusion of safety. Any stock can gap up or down on any day on a completely random and unpredictable event. This is just nature of stocks. Might as well accept this as part of trading stocks. Historical earnings dates can be also inaccurate and difficult to backtest. As well as quality of upcoming events data. Those are some of the other practical reasons why you might avoid incorporating knowledge of earning events into your trading system. Val
FWIW, there are good databases like Eventvestor that give you PIT event dates including earnings calls, FDA announcements etc. Just like there are fairly reasonable databases with PIT earnings estimates and the actual releases. The only small problem is the cost. Do you do anything special for the ex-dividend dates?
You definitely read my mind! I used to trade some MR strategies (developed by others) and occasionally there would be some big losers. When I looked into them, a fair amount were due to earning events and made me wonder if filtering them out would yield better results. I confess that I didn't backtest the strategies thoroughly myself and maybe that's the reason I lack the conviction to keep on trading them. Thanks for sharing your views and I agree it makes a lot of sense to ignore these unpredictable events.