Verisimilitude Fund

Discussion in 'Journals' started by Pekelo, Jul 15, 2006.

  1. Pekelo


    I thought, why not test my ideas posted here:

    Thus in this journal I am going to manage an imaginative fund called Verisimilitude. I will have 1 million dollars AUM for easier accounting. The goal of the fund is to mimic the performance of the S&P and trying to outperform it by a few good calls.

    Well, if you read the original thread, the strategy itself should outperform the S&P by 4% without really doing too much. But I am going to spice it up in this journal, and trying to have a much better performance then the market, using very few trades and only 1 trading vehicle.

    So this is the general strategy: I put 80% of the money in a CD yielding 5% a year. Thus it will give me a safe 4% return on capital. The rest is put in a futures brokeraccount, and will be used trading ES futures. Since 16 futures will give me exactly 1:1 leverage on the million, and the goal is beside outperforming the market to do it in the safest and less risky way, I will not overleverage. I will call this 16 contracts the Unit. Occasionally I will use less than a unit or for a quick intraday move up to 2 units, but generally, the idea is to be in the market with 1 unit when the market most likely to go up and being in cash or short when I think it is going down.

    In the original thread I came to realize 2 problems that I have to overcome when following this strategy:

    1. Avoiding margincalls.
    2. Premium between the futures and the index.

    To avoid a margincall, I have 200K on the broker's account thus if I am in the market with 1 unit, the market can fall 15% before I get a margincall. I think that gives me enough flexibility and I will get into cash or short the market if I think it is necessary.

    The premium between the futures and the index is about 3 ES points a month. Thus just to get the same performance as the S&P does, for a whole year I have to make 36 ES points more. Please note, that if I don't make that 36 points (which is 3% at current marketlevel) the fund still should make 1 % more than the S&P, because of the 4% CD interest gain.

    Since I am starting this journal just a bit after the year passed its half, my CD return is cut in half, thus I am going to get only 2%. But I only have to make 18 ES points as an advantage. Also the market yesterday closed at 1236, a full 1% below where it started the year, thus I have a built in 1.5% advantage (2+1-1.5), even if I don't make any extra points. Well, timing is everything in investing/trading. But to be honest, I will note both the absolute and relative performance at year's end.

    As a summary: The goal of this journal is to try to outperform the S&P using a simple strategy, 1 trading vehicle with relative few trades in the simplest and least risky way. The trading vehicle is most of the time 1 unit (16 ctrs of ES), occasionally using 1 extra unit for intraday moves.

    Well, since the fund has just started, I am looking for getting in long on Monday...
  2. MGJ


    Here is a plot of the premium between the eMini S&P futures, and the cash S&P index itself. The expected "sawtooth" behavior is clearly visible; the premium decays to zero as the futures contract gets closer and closer to expiration, then on rollover day the premium suddenly jumps up to reflect the new Fair Value of the new front month contract.
  3. MGJ


    And here is the raw data which created the plot. (Only one attachment per post here on ET)
  4. Pekelo


    Thanks for the chart. I think my average 3 ES per month is about right. Do you have a similar chart for the the Dow and YM?
    I think the premium there is a little bit less. At rollover the YM was about 80 points higher then the Dow, so I assume the premium is a bit less the 30 points per month...

    If there are certain times when the premium is clearly depreciating faster than usual AND I don't expect big marketmovement, than it is just better to stay in cash...
  5. If premium is 3 points a month, and eMini's roll over every 3 months (i.e. 4 times a year), then what I expect to see is
    • Premium gaps up to 9 on rollover day, smoothly decays to 0 at expiration
    • Then it gaps up to 9 again and starts the cycle all over again
    What I expect to see, is shown in the attached chart. However that's not what actually happens. What actually happens is a lot more messy; it is wrong to say that "3 points a month" approximates the real life action in the eMini.

    According to the Fair Value formula, premium varies with (A) time; (B) the numerical value of the S&P index itself; (C) interest rates. But the approximation "3 points a month" only addresses (A), it ignores (B) and (C). I think that's why it gives such a poor imitation of the real life behavior of the actual eMini's.
  6. Pekelo


    I have to disagree. Check the chart posted by MJG, and it shows that roughly that's what happens. Actually in the last few months it was LESS than 3 ES per month. Last year it only jumped up to 6 points and slowly depreciated from there.

    Look, this is not an incredibly scientific journal, so 3 ES per month will do just fine... If in the near future it gets bigger, I will adjust to it....
  7. Pekelo


    1 unit long from 1239.50
  8. What bank did you use for your CDs?
  9. Pekelo


  10. Pekelo


    Selling 1 unit at 1259.50 a 20 ES gain....
    #10     Jul 19, 2006