Fully automated futures trading

HobbyTrading said:
Thank you for your fast reply and for dissecting the proposal. It helps me to understand how to look at the mean and the distribution (skew) separately. And in what way each of these influences the overall result.

Your remarks about "demean"ing inspires me to look at the bigger picture. In my case do I have a long-only buy&hold ETF portfolio with exposure to the US equity market. Plus the futures trading system which also includes the US equity indexes (e.g. SP500, NASDAQ). The purpose of the futures system is to provide diversification to the ETF portfolio. I'll have to consider whether I want to mean or demean the related futures instruments: would that influence (improve?) the diversification? Or would I make things overly complicated for myself, without getting a real benefit from it? I like to keep things simple, but I also like to have a positive financial benefit.
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In this case it would make sense to demean your equity and bond markets, but not the other asset classes.

Think of your futures portfolio without demeaning as being composed of equity/bond beta (due to the systematic bias in the mean forecast) and some other stuff (equity/bond timing, plus beta and timing in other asset classes). You also have another lump of equity/bond beta in ETFs. The reason we don't consider demeaning the other asset classes is because we're not getting that other asset class beta anywhere else, whereas we have the option of getting it in ETFs for bonds/equities.

The question is what is the right allocation to these two things (equity/bond beta, and the other stuff)?

Having decided that, what is the best way to get that allocation? You may prefer to have an explicit allocation only via ETFs. The demeaning makes a lot of sense. For an insitutional investor, obsessed with buckets and style boxes, this is probably the path to do.

Or you may be happy to have some of your beta coming from your futures portfolio. Then don't demean.

The problem comes that demeaning or not demeaning, but not changing the allocation vis a vis ETFs and futures, will cause second order effects. So for example if you demean without changing your futures bucket allocation relative to ETFs then you will also create an implicit rebalancing from equity/bond beta towards the other stuff. If that's what you want, then fine. But if not, you may want to consider changing your futures bucket weighting.

Now if your futures portfolio is relatively well diversified then the amount of equity/bond beta that is in it will be very small indeed; small enough that this discussion is pretty academic. On the other hand if you're only trading S&P and US treasuries then this could actually be a pretty big decision worth spending a lot of thought on.

Hope that makes sense.

GAT
 
Thank you; yes, it does make sense. I was having similar thoughts: only demean those futures instruments which have a very high correlation to an ETF position. Random example: demean ES and NQ when I'm holding SPY. But not demean e.g. commodity futures such as corn and oil because I don't hold a corresponding ETF.
I do have a diversified futures portfolio, so I would indeed need to investigate whether this demeaning is academic or not. If it is not academic then indeed it would cause a rebalancing between asset classes, when looked at the combined ETF+futures portfolio.
Tangential remark: previously I had considered to remove those equity and bond futures which are also included in my ETF portfolio. This would reduce the correlation between both portfolios and thus increase diversification. Until now I haven't taken that step though. Intuitively I would say that demeaning the futures is more beneficial than removing them altogether.

My current capital allocation to the ETF portfolio vis a vis the futures trading system is based on value volatility. I want the volatility of the combined account (ETF+futures) to be slightly higher than that of the ETF portfolio. In this way I know that I have the total volatility under control while at the same time benefit from the diversification which the futures system provides.
 
HobbyTrading said:
Intuitively I would say that demeaning the futures is more beneficial than removing them altogether.
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That's correct - if you remove them altogether you completely remove a source of risk premia from your overall portfolio: the ability to time equity and bonds. Demeaning removes the beta, which is a distinct source of premia, and which you can get elsewhere via ETFs.

GAT
 
Kernfusion said:
sorry, that didn't scan :)
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It scanned for me, but couldn't parse :)
Amaranth Advisors was a company that was involved in natural gas futures rigging scandal, some info here https://en.wikipedia.org/wiki/Amaranth_Advisors (From what I gather, it was just one trader actually).

But I haven't seen any news about recent similar thing going on, except nat gas prices reaching significant highs, which I somewhat attributed to weather situation in the south of the US.
 
https://www.nasdaq.com/articles/u.s...orecasts-for-continued-hot-weather-2021-09-10

"In addition, the premium of March 2022 futures over April 2022 NGH22-J22 rose to a record high this week. The market uses the March-April and October-November spreads to bet on the winter heating season when demand for gas peaks.

The gas industry calls the March-April spread the "widow maker" because rapid price moves resulting from changing weather forecasts have knocked some speculators out of business, including the Amaranth hedge fund, which lost over $6 billion on gas futures in 2006."

Could be some interesting related news shortly. Can't say much more.

GAT
 
Kernfusion said:
oh yeah look at this, natural gas is on fire! I'm long 2 QG contracts at the moment..
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Good luck sir. Because as fast as they rise, that is as fast as they fall. It is no joke. It has killed hedge funds. Tread lightly or be destroyed.

In fact, you smell to me like an inexperienced NG trader based upon your text. If you are in profit, GTFO now, before more news about Russia comes next week.

Don't try to be a hero and just LISTEN. Seriously...LISTEN!

 
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Overnight said:
Good luck sir. Because as fast as they rise, that is as fast as they fall. It is no joke. It has killed hedge funds. Tread lightly or be destroyed.

In fact, you smell to me like an inexperienced NG trader based upon your text. If you are in profit, GTFO now, before more news about Russia comes next week.

Don't try to be a hero and just LISTEN. Seriously...LISTEN!

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no no, I'm not an experienced NG trader by any means, I didn't even know my position in it before I checked yesterday :) The system will close it automatically when the trend stops or reverses. If I start closing profitable positions manually overriding what the system wants to do, I will eventually close some position which otherwise would've rallied much higher and made all the profits for the year... Of course it's very frustrating to watch the system giving back profits, but that's the nature of this strategy\system.

Pink Floyd \m/(><)\m/ btw :)
 
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