I tried a strategy based on the book, and it stopped working for me sometime in 2017 or 2018. I seem to remember the drawdowns and consecutive losing trades were too high for me, so I gave up on it. The rule of only trading on Wednesdays doesn't make sense to me.
Fully automated futures trading
- Thread starter globalarbtrader
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I tried a strategy based on the book, and it stopped working for me sometime in 2017 or 2018. I seem to remember the drawdowns and consecutive losing trades were too high for me, so I gave up on it. The rule of only trading on Wednesdays doesn't make sense to me.
How deep\long was the drawdown?
A tail hedging strategy that actually makes money in the long run is actually very difficult to do - I haven't seen evidence that Universa does that, then yes you have a money machine: an asset that will go up in the long run (S&P 500) and another one that perfectly hedges it yet actually pays you to be hedged.
GAT
I read the book a while ago, and I can't remember if Wednesdays is arbitrary, deliberate (most people refit weekly strategies on Mondays or Fridays, so why not), or overfitting. Of course you could divide your capital into five and trade one fifth on each day of the week to smooth things out, if you really want the extra work, or just pick another day.
What is the definition of 'stopped working'? I'd be surprised if you could have a statistically significant evidence that it had 'stopped working' over what sounds like a period of just a few months.
GAT
Code:
2021-02-17:1500.24 {'type': '', 'broker': 'IB', 'clientid': 455} *CRITICAL* Error New capital with new account value of 311522 profit of -45819 is more than 12.8% away from original of 357341, limit is 0.1% whilst updating total capital; you may have to use update_capital_manual script or functionA heart stopping email indicating I've just lost 12.8% of my capital in a couple of hours; turns out it was a blip in the IB data, but just goes to show these filters have these place (in this case, preventing my capital series from being overwritten with an incorrect value, which had this happened this evening would have caused uneccessary trading).
GAT
Regarding Wednesdays, "Stocks on the Move" says
I don't really remember how large the drawdown was, just that it appeared larger than what I saw from backtesting. So it might not have been statistically-significant (I should probably read Robert's "Systematic Trading" book).
I guess I was uncomfortable with how my implementation of the strategy entered and exited trends too late.
They have some papers published on their site. E.g. https://www.universa.net/UniversaResearch_SafeHavenPart1_RiskMitigation.pdf
From my understanding, they are not after making money in the long run, but to provide a hedge ("insurance") against large market drops.
In the paper they explore a "cartoon" example portfolio of 97% S&P 500 and 3% insurance.
The insurance loses 100% if S&P 500 performs -15% or better for the year. Therefore you would have a -3% drag on the performance most of the years.
In case of S&P 500 ending a year below -15% the insurance pays out 900% return (+27% on 3% allocation).
If worse than -15% years happen once in a decade, then the expectancy of this insurance is 0.
It turns out even if this insurance is taking away 3% annually and has expected return of 0, it still outperforms the market.
The idea is that by eliminating highly negative returns, the mean log return (therefore CAGR) is increased significantly. They call these large negative returns "volatility tax" from which it is hard to recover.
To quote their intro paper at http://universa.net/UniversaResearch_SafeHaven_AmorFati.pdf
Past returns persist in the present and future via the simple mathematics of compounding: The geometric mean return is mathematically the (exponential of the) average of the logarithms of the arithmetic returns; because the logarithm is a concave function (i.e., it curves downward), it increasingly penalizes negative arithmetic returns the more negative they are. One big loss impacts your CAGR in a painfully disproportionate, exaggerated way, and it never goes away.
I guess this is called "self-inflicted damage"? It is good to have warnings in place though.
I once read the book written by the firms's CIO - "the Dao of Capital." It was a misterious book, with full of philosophical things. The book talks very little of technicals, but it says that you need to buy deep out of the money put option of S&P500, with about 40% implied volatility and with 2 months maturity, and to keep rolling.
There is a bloomberg artcle that says the firm gained 3600% return in the crisis 2020 March, which I guess you already know.
You might find "The Alpha Formula" also interesting, which is written by Larry Connors / Chris Cain. I read the free sample pages only but it looked interesting. I was amazed that there are so many books available in market that talks about trading strategies...I'm reading "Stocks on the move", and the strategy described there seems really good! At least for someone like me who also has a long-only portfolio.
It's a simple stock momentum strategy. We just rank stocks according to their momentum and buy the top-performers. + there are several additional rules: we never go short and we have a simple regime filter - the parent-index (from which we select the stocks) should be above it's 200-day moving average to open new positions. I.e. we don't buy new stocks in bear markets.
There's also of course some simple position-sizing rules based on volatility of each stock, and a simple stop loss rule - if the stock goes below it's 100-day moving average, gaps 15% or gets excluded from the index - we sell it (recent gaps also disqualify new stocks from being bought - we like steady performers, not wild swings).
The results are simply awesome: every metric (return, max drawdown..) is ~2 times better comparing to buy-and-hold the same index (which I'm doing right now, though, in a more diversified manner). We're not talking about +20% every year of course, but it appears to beat the index with a wide margin.
Also, the strategy isn't doing anything that could be "really wrong" - i.e. we're buying multiple stocks from a large index. I mean yes, sometimes we're staying in cash while the index is tanking, so we might miss on a big recovery, but that saves us from some risk..
So it appears that at least re-allocating a certain portion of a long-term portfolio to this strategy seems like a no-brainer. Apart from needing to do some coding to implement all of this, which in my case is actually a positive thing, as I was looking for something fun to do.
The book was written in 2015, so first of all I'm going to backtest this strategy all the way to the current date and see how it performed out of sample, but from the general principles, this seems to be a strategy that relies on broad fundamental things and should probably work "forever".
Also, the actual technical details of the strategy seem quite simplistic, maybe because the book was written for a very wide audience who might be easily scared by words like standard deviation, so maybe there's some room for improvement there, g.e. instead of 200-day moving average on the index, we could use the combined forecast form the existing futures trading system on the corresponding index-futures (i.e. only but the individual stocks if the combined index-future forecast is > 0 ). Also, maybe try to diversify across time with multiple rules for determining individual stock-momentum, instead of using just one 90-day lookback..
I also heard of a research which suggested excluding the most recent (1 month?) history when estimating stock momentum, because stocks actually tend to mean-revert more than trend in this time-frame (which actually might suggest adding another small counter-trend rule to the mix, which buys recent pullbacks..). Also, I wander what indexes are the best candidates to do this, regular S&P500, or maybe a wider (world-stocks) index, or maybe a small-cap one, specifically from the perspective of combining this with the a regular diversified buy-and-hold portfolio..
But mostly I'm interested if there are any reasons for NOT doing this (i.e. replacing a part of a long-only well-diversified (20%world bonds, 75% world stocks 5%gold) portfolio with such a stock-momentum strategy)?