Global Macro Trading Journal
- Thread starter Daal
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From 2013:
"Jim Leitner of Falcon Investments is one of the great all-time Macro HF investors, and his presentation emphasized his philosophy and advice on trading. ‘Be a Fox, not a Hedgehog’, he advised, suggesting that it is a mistake to become an expert on one topic. And to look for disconfirming evidence rather than just clinging to what you think is a ‘fact’. Always ask what would make your view/position wrong. Instead, he advised being open to lots of ideas and look for ideas everywhere. It is not possible to monitor all markets, asset classes and opportunities. Hence the trick is to create a diversified network of friends that helps you scan the world for opportunities.
The way he operates is to take many independent bets. When you do that, size is a crucial determinant of performance. He sizes on the basis of the Kelly criterion, which helps choose position size both in absolute sense and relative to other trades. His approach is actually more defensive than this; he typically chooses sizes that are ½ that suggested by using Kelly. He notes that when things go wrong, everyone’s time horizon shrinks. Sizing positions conservatively allow you to not only hold on to a position when things go wrong, but also leaves room to add in better circumstances."
http://www.drobny.com/assets/_control/content/files/072513.pdf
"Jim Leitner of Falcon Investments is one of the great all-time Macro HF investors, and his presentation emphasized his philosophy and advice on trading. ‘Be a Fox, not a Hedgehog’, he advised, suggesting that it is a mistake to become an expert on one topic. And to look for disconfirming evidence rather than just clinging to what you think is a ‘fact’. Always ask what would make your view/position wrong. Instead, he advised being open to lots of ideas and look for ideas everywhere. It is not possible to monitor all markets, asset classes and opportunities. Hence the trick is to create a diversified network of friends that helps you scan the world for opportunities.
The way he operates is to take many independent bets. When you do that, size is a crucial determinant of performance. He sizes on the basis of the Kelly criterion, which helps choose position size both in absolute sense and relative to other trades. His approach is actually more defensive than this; he typically chooses sizes that are ½ that suggested by using Kelly. He notes that when things go wrong, everyone’s time horizon shrinks. Sizing positions conservatively allow you to not only hold on to a position when things go wrong, but also leaves room to add in better circumstances."
http://www.drobny.com/assets/_control/content/files/072513.pdf
Real Returns from a better designed investment strategy from the perspective of a Greek investor from 2007-2016
Allocation is 50% Greek 10y Bonds, 10% Greek stocks, 10% S&P500, 15% US 10y Bonds, 15% Gold. Rebalanced yearly
The idea was to put US assets in the 10-20% 'optimum' range for a new asset class while still respecting each asset class total weighting (US bonds funds were 'obtained' from Greek bonds and US stocks from Greek stocks)
-15% real while their entire country fell apart doesn't seem bad. Greek bonds were down 60% and the stock market 89%. This portfolio was about flat in nominal terms. Real returns were -5.5% without rebalancing. Max drawdown was a tough -47% (-31.5% with no rebalancing)
And this was a conservative 25% allocation to foreign assets. One could make the case that given Greek's history (looking a the Reinhart & Rogoff data), that Greek investors should have a higher allocation to foreign assets.
Also, the backtest was quite unfair given that the starting date was the peak of the stock market and not much after the bond market peaked. Had I started in the early 2000s, returns would be much better. But I'm just trying to 'stress test' an allocation there and the results show that a diversified investor would have well despite the horrendous enviroment
Allocation is 50% Greek 10y Bonds, 10% Greek stocks, 10% S&P500, 15% US 10y Bonds, 15% Gold. Rebalanced yearly
The idea was to put US assets in the 10-20% 'optimum' range for a new asset class while still respecting each asset class total weighting (US bonds funds were 'obtained' from Greek bonds and US stocks from Greek stocks)
-15% real while their entire country fell apart doesn't seem bad. Greek bonds were down 60% and the stock market 89%. This portfolio was about flat in nominal terms. Real returns were -5.5% without rebalancing. Max drawdown was a tough -47% (-31.5% with no rebalancing)
And this was a conservative 25% allocation to foreign assets. One could make the case that given Greek's history (looking a the Reinhart & Rogoff data), that Greek investors should have a higher allocation to foreign assets.
Also, the backtest was quite unfair given that the starting date was the peak of the stock market and not much after the bond market peaked. Had I started in the early 2000s, returns would be much better. But I'm just trying to 'stress test' an allocation there and the results show that a diversified investor would have well despite the horrendous enviroment
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I'm doing some backtests with rebalancing on and off because I believe rebalancing is a trading strategy like any other. Sometimes it will do well, sometimes it will do poorly. I believe its not too dissimilar to using moving averages in order to time asset allocations. Some people see US investment returns boosted by using moving averages as a timing strategy on SPY, TLT, etc and they think there is some kind of free lunch. I dont think there is, sometimes that strategy will be great, sometimes it will be poorly. Just like rebalancing.
But they do have different risk profiles. It appears that rebalancing increases tail risks (because you keep buying all the way down) while moving averages (by keeping you out of a plunging market), decreases tail risks and max drawdowns.
This leads to an interesting portfolio strategy. To implement rebalancing in the assets of the country that you believe has more resilient fundamentals and to be more cautious (and use moving averages) in the assets of the country that is more uncertain.
So a Russian investor looking to allocate capital could do own 60% of Russian assets and 40% in US assets. Then he would implement rebalancing in the US allocation (If he's got gains in Russian assets and US assets are down, he would send funds there, but if Russian assets are down and US assets are up, he would not send funds to Russia) but use moving averages in the Russian allocation to cut out tail risks (which in the country seem significant versus the US). So if the Russian stock market closes bellow its 200 MA, he would sell out and allocate to something else (perhaps cash in the bank in Russia or some other idea). When it went back above the 200MA, he would go back in Russian stocks.
I need to run backtests using moving averages as a timing device. As far as I'm aware, it performs great in trending markets but hurts returns in choppier markets. So, no free lunch but it has have a much lower tail risk profile so its a good tool in the toolbox
But they do have different risk profiles. It appears that rebalancing increases tail risks (because you keep buying all the way down) while moving averages (by keeping you out of a plunging market), decreases tail risks and max drawdowns.
This leads to an interesting portfolio strategy. To implement rebalancing in the assets of the country that you believe has more resilient fundamentals and to be more cautious (and use moving averages) in the assets of the country that is more uncertain.
So a Russian investor looking to allocate capital could do own 60% of Russian assets and 40% in US assets. Then he would implement rebalancing in the US allocation (If he's got gains in Russian assets and US assets are down, he would send funds there, but if Russian assets are down and US assets are up, he would not send funds to Russia) but use moving averages in the Russian allocation to cut out tail risks (which in the country seem significant versus the US). So if the Russian stock market closes bellow its 200 MA, he would sell out and allocate to something else (perhaps cash in the bank in Russia or some other idea). When it went back above the 200MA, he would go back in Russian stocks.
I need to run backtests using moving averages as a timing device. As far as I'm aware, it performs great in trending markets but hurts returns in choppier markets. So, no free lunch but it has have a much lower tail risk profile so its a good tool in the toolbox
Here is an interesting currency strategy
http://oxfordclub.com/files/2013/06/COMMIR8-TheMaxYield-300R0125631.pdf
The idea is to own a high yield currency from a developed or semi-developed country every year. That's a way to capture the 'forward rate bias'. The excess premium one can earn by owning high yield currencies. I view this premium as similar as to owning stocks, most of the time it gives off a nice excess return but the trade-off is a large drawdown every once and a while (and right now, I think this Max yield is holding the bag on the TRY). For that reason, I believe it makes sense to treat this like a stock market position, with limited amount of capital and the expectation of volatility.
But the nice thing is that it provides diversification because it wont correlate 1-1 with stocks (regardless of where those stocks are locate). Sure, in an 2008 type crises, there will be a high correlation but in most years and most of the time, it will provide an additional uncorrelated return stream to the risk capital that someone deploys.
I personally dont use this strategy because, being from Brazil, I'm already heavily exposed to 'high yielders' as the BRL is the mother of all high yielders (in real terms) but its an interesting strategy. If I were to trade this, I would limit exposure to 5-10% of risk capital and make sure I added another layer of filtering to the countries that I was investing in
http://oxfordclub.com/files/2013/06/COMMIR8-TheMaxYield-300R0125631.pdf
The idea is to own a high yield currency from a developed or semi-developed country every year. That's a way to capture the 'forward rate bias'. The excess premium one can earn by owning high yield currencies. I view this premium as similar as to owning stocks, most of the time it gives off a nice excess return but the trade-off is a large drawdown every once and a while (and right now, I think this Max yield is holding the bag on the TRY). For that reason, I believe it makes sense to treat this like a stock market position, with limited amount of capital and the expectation of volatility.
But the nice thing is that it provides diversification because it wont correlate 1-1 with stocks (regardless of where those stocks are locate). Sure, in an 2008 type crises, there will be a high correlation but in most years and most of the time, it will provide an additional uncorrelated return stream to the risk capital that someone deploys.
I personally dont use this strategy because, being from Brazil, I'm already heavily exposed to 'high yielders' as the BRL is the mother of all high yielders (in real terms) but its an interesting strategy. If I were to trade this, I would limit exposure to 5-10% of risk capital and make sure I added another layer of filtering to the countries that I was investing in
I was re-reading The Invisible Hands book and run into an interview that I had forgotten about that its pretty awesome. "The Predator", he talks about how a good macro trader has to be adaptive. In 2008 he was a cash manager, he was mostly sitting in cash and expecting things to be pretty rough. In late 2008 he came a investment grade bond manager, he did not care about stocks but he loaded up in corporate bonds. They were yielding so much and he didnt think things would be that bad (That was a big mistake that I made by not doing that, even though I considered that option). By early 2009, these bonds had rallied but stocks plunged. At that point he came a value stock buyer, 'buying all the deep value I could find'. I believe that included some banks. After that big 2009 pop, he became a long-only index fund manager and 'trying not to get distracted by the people talking about the end of the rally' because 'those who were negative and have not participated in the recent rally are looking for an excuse'
"In markets, you cannot be one thing or another, rather, you have to evolve according to different market enviroments"
This guy is pretty cool, I have no idea how I had forgotten about this interview before. This is pretty much the road map that I'm following in my Brazil theme (I'm in the index fund phase and plan to ignore all the people that will tell me to sell, and I'm likely to ignore them for years).
But this Predator guy just looks like a great applier of the "minimax regret" investment strategy.
"In markets, you cannot be one thing or another, rather, you have to evolve according to different market enviroments"
This guy is pretty cool, I have no idea how I had forgotten about this interview before. This is pretty much the road map that I'm following in my Brazil theme (I'm in the index fund phase and plan to ignore all the people that will tell me to sell, and I'm likely to ignore them for years).
But this Predator guy just looks like a great applier of the "minimax regret" investment strategy.
in Early 2016 I thought a way to minimize regret was to follow a balanced/risk parity type of approach, so I did that. I wanted to take some risk (not to miss upside) but still be cautious as not to be too aggressive when CBs were pulling support. Now, after Trump, I'm suspecting equities are in a better position and the downside (as measured by the frequency of a 10%+ drop) will be more limited. So the minimax regreat tweak that I did was to be in a diversified type portfolio but to be overweight in equities. I believe there will be more regret in terms of missing upside in equities than in the downside
There seem to be two main ways to create some Alpha. One is to become an specialist in one specific asset or strategy and try to be the best one in that field, like Buffett does with stocks and Gundlach does with bonds. The second way is to be invested in (or to be overweight) the most attractive asset class (and underweight or uninvested in the others). Then the person switches from one to another as risks and rewards shift. That's "The Predator" method.
A lot of people avoided 2008 losses or even profited from that crisis, not because they are good at asset class timing or because they are this 'multi-skilled' manager that The Predator described. But simply because they have a propensity to bearish thesises. They fall for bearish ideas and themes very easily. 2008 had this thesis going around that it was going to be the apocalypse. As a result, these bearish managers outperformed. But their true test came when it was time to flip their books and go long. The vast majority did not do that, which suggests that they did not had any skill in 'predicting' the crisis but rather, luck that their main bias (being bearish) happened to fit that period well. This is a point that Howard Marks makes on his book
I would put a lot of people in that category, even myself. I was too young to know any better at the time. Too risk averse, too propense to fall for bearish ideas. As a result, I had a difficulty buying risk even though part of my analsys said some assets/markets were a buy. I still bought some, but only when I found a additional layers of protection .
https://www.elitetrader.com/et/threads/earning-interest-income-in-cash-with-ib.145076/
In this case the layers were the too big to fail element plus the fact that IB was paying 0%. So I did some rudimentary version of taleb's barbel by having 80-90% of funds in cash but 10-20% in too big to fail bonds
The comments from the thread are priceless btw
But I learned a huge deal from those mistakes. Thinking about the 2007-2012 period yielded a huge amount of lessons. So many it could fill an encyclopedia.
As a result of those lessons, when the Brazil crisis happened, it all looked very clear to me. It was a very similar playbook. I didnt even had much difficulty getting involved. It was very clear I had to ignore the bears. I really hope I see another 08 type crisis again in my lifetime. I believe I can play that cycle a lot better than the last time around, both on the way down as well as on the way up
I would put a lot of people in that category, even myself. I was too young to know any better at the time. Too risk averse, too propense to fall for bearish ideas. As a result, I had a difficulty buying risk even though part of my analsys said some assets/markets were a buy. I still bought some, but only when I found a additional layers of protection .
https://www.elitetrader.com/et/threads/earning-interest-income-in-cash-with-ib.145076/
In this case the layers were the too big to fail element plus the fact that IB was paying 0%. So I did some rudimentary version of taleb's barbel by having 80-90% of funds in cash but 10-20% in too big to fail bonds
The comments from the thread are priceless btw
But I learned a huge deal from those mistakes. Thinking about the 2007-2012 period yielded a huge amount of lessons. So many it could fill an encyclopedia.
As a result of those lessons, when the Brazil crisis happened, it all looked very clear to me. It was a very similar playbook. I didnt even had much difficulty getting involved. It was very clear I had to ignore the bears. I really hope I see another 08 type crisis again in my lifetime. I believe I can play that cycle a lot better than the last time around, both on the way down as well as on the way up