Algos for Alpha Systematic Trading in Global Macro Markets

31 Pages·2011·1.42 MB·English

by  Sherpa Laptop

“Algos for Alpha”
Systematic Trading in Global Macro Markets
Quant Invest APAC Conference
Shanghai, December 8th 2011
Today’s Message
• Algorithms Give Consistency
• Consistency is an ‘Edge’
• Experience/Empirical Evidence
– Human Traders are bad at Consistency
– Human Traders can make money, but few are
consistent
• Consistent over Time
• Consistent with the Fund Goals
The ABC of Investing
• Alpha
– Non-Correlated Excess Returns
• Beta
– General “Class” Investments
• Profit from the movement of the asset class
• Carry
– Yield Gap
• Profit from holding asset, avoid losses by quick exit
Comparison
Investment Alpha Version Beta Version Carry Trade
Type
Property Renovate an old Buy an apartment off Buy to Rent with 90%
house plan Financing
Stocks Visit a company and Index Tracker or Buy High-Dividend
get to know it , see Large Portfolio Stocks, financed at
value where others Minimize Slippage low rate
haven’t yet
Industry Innovate a new Participate, own a Finance and Build a
process process/factory Utility
FX, Interest Buy Lower (Index Product?) Emerging Markets
Rates Sell Higher AUDJPY
Alpha Investing
• ‘Alpha’ Returns (i.e. more than ‘Risk Free’)
come from
– Work, Effort, Application
– EDGE
– Cons: Being ‘Involved’ doesn’t generate returns
– Pros: The Return is Uncorrelated
• So what Leads us to use Algorithms?
• We need an EDGE.. Otherwise we shouldn’t Trade!
You want Alpha, What’s your Edge?
• Excess Uncorrelated Returns require an
advantage
– Information and Spread
– Client Flow gives the ‘Sell-Side’ both of these
– Arbitrage
– Tax, Regulatory, Capital Base, Access
– Analysis
– Inconsistent Excess returns are down to ‘Luck’ not Analysis
Systematic Trading
• The Analysis is important…… but
• The Edge of Systematic Trading is ‘CDF’
– Consistency
– Discipline
– Focus
• Searching for Alpha without CDF
– Retail FX: 80% of Leveraged Clients lose half of
their capital within 3 months
(Source: Interviews with UK Brokerages)
Consistency
• Being Consistent when Trading
– Means matching the Fund’s long term goals when
choosing:
• Trade Entry Point, Trade Size, Trade Exit Point
– 2nd & 3rd above are often overlooked, but turn out to be more
important than the 1st
– Keeps you from ‘blowing up’
• You stay active longer, your analytical edge can show
Calibrate For Consistency
• What is your response to a 1% Profit or Loss?
– How about a 0.10%, 5%, 10%, 15% Profit or Loss?
• -0.10% is of similar importance to +0.10%
• -1% is more important that +1%
• -5% is way more important than +5%
• -10% means we are stopped out for the year,
+10% is a very good month.. (is it too good to be true?)
• -15% means we have broken our covenants…
+15% is our annual target
Picture of how we feel about P&L
Loss Profit
‘Utility’
How do you feel about
the P&L?
There’s no Profit that can make up for a -5% Loss
Incentive is: Win Small and Often, and Never Lose Big