Track record ETF portfolio 2015 – 05 – 15

Nothing speaks louder than a track record. There is no shortage of interesting indicators, strategies, ideas, but in the end, we trust only one thing: track-record. Track record sheds a crude light over two things: robustness of the strategy and quality of execution.
In 2013 and 2014, I wanted to start a hedge fund out of this strategy. We gathered some interest, but we were not able to raise enough assets to make it a viable commercial proposition. Reason was simple: live track-record. The strategy had been running on paper for years, (my bonus was calculated out of it so it was serious), but my employer back then had no interest in seeding a product that would be radically different from their product line-up. Being a sushi chef in a steakhouse does not have a bright long term career prospect.
So, here are three things I have committed to, I will:
  • run this strategy live with real money
  • put 3/4 of my life savings in it
  • publish the track record on our website
Track record for the week-ended May 15th
Attached is a pdf of the track record. The portfolio is still in ramp-up phase. Large positive net exposure is due to the abundance of bullish signals across the investment universe.
Borrow can be thin and fairly expensive for some ETFs. As a results, 3 short candidates were rejected. Borrow ranged from 6% to 9%.
Strategy synopsis
This strategy was developed on the short side, in order to underperform the longest bear market in modern history: Japan equities. This is why it has many counterintuitive features that make sense in aggregate. It relies on three assumptions: persistence of trend, risk management, capital efficiency. If trends persist, then temporary weaknesses/strengths constitute high probability entry points on the Long and Short sides, respectively. It also means that as probabilities recede, risk increases. It is therefore prudent to reduce risk, as trades mature. Capital efficiency simply states that compounded resources put back in circulation should be consistently re-allocated to fresh positions. We assume we cannot predict the future and do not know which trades will be big winners, so we keep on fishing.
The strategy is composed of two modules: entry/exit signals and money management. It takes a bit of grit (> 3,762 hours) to simplify every element to its bare essence. The objective is to continuously invest in successful trends, while reducing risk along the way.
Signal Module
Entry and re-Entry conditions are simple. It is easy to get in, but hard to stay in. Exits, on the other hand, took hundreds of hours for a simple reason: the quality of exits determines the shape of the P&L distribution. Entry is a choice, exit is a necessity. The exit process has been simplified from 9 layers to 3.
  1. Regime definition for all constituents in the universe
    1. Bullish: higher highs & higher lows
    2. Bearish: lower lows & lower highs
  2. Entry: “Buy on Weakness” (Bullish Weakness) and “Short on Strength” (Bearish Strength)
    1. Long: enter the day after a swing low has been recorded && dominant trend is bullish, “Bullish weakness”
    2. Short: enter the day after a swing high has been recorded && dominant trend is bearish, “Bearish Strength”
  3. Exits: There are three types of exits:
    1. Stop Loss: isometric staircase stop loss: all open positions are closed. Stop Loss is calculated as the swing value +/- an allowance for volatility expressed in Average True Range (ATR).
    2. Trend reversal: if a trend reverses from bullish to bearish, all Long open positions are closed. This is the highest possible point at which positions can be logically closed. Symmetrical rules apply on the short side when a trend reverses from bearish to bullish
    3. Risk reduction: every new position carries risk to the equity. So, the priority is o reduce risk. We have developed a proprietary adaptive exit threshold (AET) algorithm that optimizes the quantity to be closed, while reducing risk to near zero level
  4. Re-Entry: re-entries are allowed only after a partial exit has taken place. Re-entries are only possible along the trend
  5. Stock selection and order priority:
    1. Signals: every day, signals on ETFs, Forex and major indices are published on our website. Candidates come exclusively from that list. The exact same information is available to everyone, including myself.
    2. Priority: Candidates are ranked by position size: the bigger, the better. Borrow check happens before position sizing. Thin expensive borrow is an indication of how crowded trades are. All trades with borrowing fee above 5% are rejected. This is the only difference between Longs & Shorts.
Money Management
Money is made in the money management module. Risk is an obsession. Risk is not an abstract debate over a thesis. Risk is a series of numbers, made visual so as to stay painfully compelling at all times. Our basic philosophy is: profits look big only to the extent that losses are kept small. Tomorrow’s reward cannot be predicted, but risk can be managed today. Our proprietary position sizing algorithm responsively manages risk (per trade and in aggregate), exposures, position sizes in real time.
  1. Alpha Secure: This proprietary position sizing algorithm is so impressive that the company was named after it. This is the best tool to weather drawdowns and re-accelerate during winning streaks.
  2. Net exposure:
    1. This is an absolute directional Long and Short model: both sides are expected to generate alpha. Directionality (+/-100%) is only tolerated because of the low correlation between constituents (ETFs). If the universe was composed of stocks within a index, we would run relative series and collapse net exposure to +/- 20%
    2. Net exposure is a direct function of signal generation. For now, the vast majority of signals are bullish. I woke up -100% net short every day for 8 years. So, net exposure will go deeply net negative when needed.
  3. Gross exposure: Gross exposure will be limited to less than 400% so as to avoid margin calls. Gross exposure is a function of market’s money and the Alpha Secure algorithm
  4. Cash deposits: Cash is maintained in various currencies. Forex is another tool in the toolbox to increase equity
When managers say “I want to make as much money as possible”, it usually means “I have no risk-control in place”. Expressing objectives in terms of absolute performance percentage points fall into the outcome bias trap. This is a process driven portfolio. Accordingly, objectives are expressed in process metrics. Those are a) reward to risk above 3 for risk management, b) Common Sense Ratio between 1.8 to 2.1 for robustness, 3) trading edge of 0.5 to 1.5 for quality of performance. System will be considered bankrupt if maximum drawdown reaches -20%.
Chart examples:
Charts published every day contain the same information as the ones traded, but presented in a different fashion.

The first chart shows over-imposition of the Buy/Sell strategy over the public chart. They contain rigorously the same information. The only difference is the order logic component, absent in the public display chart, so as not to constitute a Buy/Sell strategy.
  • Stop Loss is the dotted line below each swing Low
  • Numbers preceded by the # sign (for example:#7.6%) are a rudimentary position sizing algorithm that assumes -1% loss to the equity if a position was entered at the Close of the day when the signal happens and stopped at the lower dotted line on the Long side (upper dotted line on the short side)
  • The upper dotted line is a level at which closing half (50%) the position would ensure the trade breaks even thereafter
Black triangles symbolise entries. Stacked black triangles represent single entry but multiple/split exits
Red/Green inverted triangles symbolise exits. Stacked triangles represent final exits. In the example above, the four triangles show the final exit of 4 open positions. Trend reversed from bullish to bearish.
 This is the public version of the same chart. Numbers are rigorously the same. Any smart trader can figure out for herself. In fact, the public version has the advantage of giving free will back to traders. It leads itself to multiple permutations, free from the “mechanical” constraint of a systematic strategy. For example, sideways periods can be used to accumulate stocks, or stay out of the markets.
Below are examples on the short side, with both the “weaponized” and public versions of the same chart. Strategy is symmetrical. It was developed on the short side and then translated to the Long side.
The key to being successful on the short side is to take risk off the table. and top-up successful positions. This is exactly what this strategy does.
Charts stripped of Buy/Sell signals lend themselves to multiple combinations and permutations. For example, the three low dotted lines indicated a volatility adjusted inverse head and shoulder pattern: volatility abated and as a result, stop loss moved higher, a movement that preceded a trend reversal.


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