Your great narrative, mate, evoked feelings. If you're a long-term trend follower, why are you writing about something Cocoa did the other day? Who cares about Cocoa's one-day move? I'm perplexed that you offer a systematic trend program, but "options are used to manage/replace the delta of open futures positions and control risk on a discretionary basis." If I average the results of your three programs this year through the end of April, I get 7%. The replicator is up 16%; you know, the one who trades a few contracts. I'm trying to figure out how systematic you are with your discretionary options. Perhaps you are a competent discretionary trader. However, being discretionary does not make you systematic.
a) Correct, I'm not too fussed about how cocoa trades on a single day. I mentioned it because cocoa has been a prominent long position for us for many months now. We didn't scale back the exposure, although the notional contract size has essentially quadrupled compared to the time of trade initiation. The daily ATR is much greater, which means cocoa can - and sometimes does - move the needle in our portfolio. Cocoa dropped 20% in a day and we lost a few basis points. The point to make (and what this post is about), is that diversification across many markets is a good thing. We had many other positions that worked well for us, compensating/diluting the give back in OTE from cocoa. That's the point.
b) Unless you have an overlord AI that runs everything for you, all systematic trading is - at the end of the day - the mechanical implementation of discretionary logic. You come up with rules, code them, systematize it all, and then trade it.... until you decide to make the tiniest of changes to these rules, which is the discretionary part. Call it "evolvement" or "research" - which is all true, but when all is said and done, we have to accept that systematic traders are discretionary traders. We do some discretionary risk management trades with options. Sometimes that's good, sometimes it's not. Over time, it's been good for us. I can't say it'll be good going forward. We are not systematic at all with our option trades, it's 100% discretion.
c) Nobody needs us to be a 2.0 version of established trend following traders that have billions in AUM and very long term track records. If we correlated with 1.0 (or say >0.8) to the replicator you mention, then we'd have zero value proposition and no benefit for the portfolios of our clients. Since we started trading live, we've outperformed the replicators and most funds with a small number of markets by a long way. But with our small edge in the markets, there's a good chance this can flip for a couple of years and we'll underperform others. It's painful, but something to keep in mind and be ready for.
Stan Druckenmiller: “I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept anywhere. And if you look at all the great investors...they tend to [make] very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved...if you really see it, put all your eggs in one basket and then watch the basket very carefully.”
I suppose it could be argued that textbook MPT diversification (stocks + bonds + commodities long only) is a different kind of diversification from TF diversification (more markets = more potential of finding one outlier to pay for all the stop losses) and that going all in on a diversified trend system is a concentrated bet. But then you also have Dalio calling diversification (more MPT style) the Holy Grail.
Isn't it fascinating how views on diversification are so diametrically opposed and yet both camps have good long-term outcomes? Choose your poison I guess.
The only way to get high returns without dying in the attempt is to apply strong leverage ---> the only way to apply strong leverage without dying in the attempt is to drastically reduce volatility.
Many "trend strategies" or supposed "factor" strategies live exclusively from reducing volatility through diversification and they don't even know it yet.
I'd like you guys to comment on what Jim Simmons approach was to markets. It seems to have been let the math speak for itself and get people out of the way as much as possible. I could be wrong
From what I know/read that's very likely the case. We've written and talked about Rentec some while ago on Twoquants, but this might be a good point in time to discuss the topic again
Your great narrative, mate, evoked feelings. If you're a long-term trend follower, why are you writing about something Cocoa did the other day? Who cares about Cocoa's one-day move? I'm perplexed that you offer a systematic trend program, but "options are used to manage/replace the delta of open futures positions and control risk on a discretionary basis." If I average the results of your three programs this year through the end of April, I get 7%. The replicator is up 16%; you know, the one who trades a few contracts. I'm trying to figure out how systematic you are with your discretionary options. Perhaps you are a competent discretionary trader. However, being discretionary does not make you systematic.
Thanks for this - and a couple of points on this:
a) Correct, I'm not too fussed about how cocoa trades on a single day. I mentioned it because cocoa has been a prominent long position for us for many months now. We didn't scale back the exposure, although the notional contract size has essentially quadrupled compared to the time of trade initiation. The daily ATR is much greater, which means cocoa can - and sometimes does - move the needle in our portfolio. Cocoa dropped 20% in a day and we lost a few basis points. The point to make (and what this post is about), is that diversification across many markets is a good thing. We had many other positions that worked well for us, compensating/diluting the give back in OTE from cocoa. That's the point.
b) Unless you have an overlord AI that runs everything for you, all systematic trading is - at the end of the day - the mechanical implementation of discretionary logic. You come up with rules, code them, systematize it all, and then trade it.... until you decide to make the tiniest of changes to these rules, which is the discretionary part. Call it "evolvement" or "research" - which is all true, but when all is said and done, we have to accept that systematic traders are discretionary traders. We do some discretionary risk management trades with options. Sometimes that's good, sometimes it's not. Over time, it's been good for us. I can't say it'll be good going forward. We are not systematic at all with our option trades, it's 100% discretion.
c) Nobody needs us to be a 2.0 version of established trend following traders that have billions in AUM and very long term track records. If we correlated with 1.0 (or say >0.8) to the replicator you mention, then we'd have zero value proposition and no benefit for the portfolios of our clients. Since we started trading live, we've outperformed the replicators and most funds with a small number of markets by a long way. But with our small edge in the markets, there's a good chance this can flip for a couple of years and we'll underperform others. It's painful, but something to keep in mind and be ready for.
Thanks again for the comment.
Stan Druckenmiller: “I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept anywhere. And if you look at all the great investors...they tend to [make] very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved...if you really see it, put all your eggs in one basket and then watch the basket very carefully.”
I suppose it could be argued that textbook MPT diversification (stocks + bonds + commodities long only) is a different kind of diversification from TF diversification (more markets = more potential of finding one outlier to pay for all the stop losses) and that going all in on a diversified trend system is a concentrated bet. But then you also have Dalio calling diversification (more MPT style) the Holy Grail.
Isn't it fascinating how views on diversification are so diametrically opposed and yet both camps have good long-term outcomes? Choose your poison I guess.
The only way to get high returns without dying in the attempt is to apply strong leverage ---> the only way to apply strong leverage without dying in the attempt is to drastically reduce volatility.
Many "trend strategies" or supposed "factor" strategies live exclusively from reducing volatility through diversification and they don't even know it yet.
Concentration = Luck or Trap
I'd like you guys to comment on what Jim Simmons approach was to markets. It seems to have been let the math speak for itself and get people out of the way as much as possible. I could be wrong
From what I know/read that's very likely the case. We've written and talked about Rentec some while ago on Twoquants, but this might be a good point in time to discuss the topic again
https://twoquants.com/the-man-who-solved-the-market-part-1/
https://twoquants.com/the-man-who-solved-the-market-part-2/