Is this strategy marketable?

[Manny Mendelson]

I recently saw a post on LinkedIn that said a quant-oriented asset allocator was looking for strategies with a Sharpe Ratio greater than 0.7 and a track record of at least 12 months. I then realized I had real-world trading results that beat those benchmarks, in an account devoted to a single strategy, that I could demonstrate in a verifiable manner, through Interactive Brokers “Portfolio Analyst” report.

This strategy does not “blow the doors off”, but it appears to have been quite stable for the last 19 months with very low drawdown.

Again, actual trades, not a back test.

Interactive Brokers reports the following:

Returns (1/1/16-7/31/17) 13.84%
Sharpe Ratio 1.13
Max Drawdown 1.56%

This strategy will generate approximately make between 0 to 10 trades per month. I have actually been trading it since 2014 but it was intermixed with other strategies in the same account. The results since Jan 2016 are clean. My results and equity curve going back to 2014 look quite similar to the results from 2016 to present. 205 trades.

Obviously, I do trade the strategy myself, but it can scale and so I applied to the site mentioned in the Linkedin post. Never heard anything substantive from them.

Is this performance something that could attract investors?

 

[lindq]

Is this performance something that could attract investors?

Given that your system has strongly under performed buy-and-hold the S&P, I would not wait for the phone to ring.

 

[nonlinear5]

Sharpe Ratio 1.13
Is this performance something that could attract investors?

According to MorningStar, the Sharpe Ratio of the S&P 500 index fund is 2.34 for the last year. The longer-term historical average is much lower, at about 0.5. So, your 1.13 ratio may look attractive (if you can sustain it for a decade), and this is what probably motivates the LinkedIn asset allocator looking for good risk-adjusted performance. However, the recent passive index performance has been difficult to surpass, as lindq noted.

The Sharpe ratio includes the "risk-free rate" component, and the "volatility" component. In the current environment of ultra-low rates and record low volatility, the Sharpe ratio will reflect it accordingly.

 

[truetype]

Questions any allocator will ask you...
-- What instruments? (allocators especially don't like short-Greeks option strategies)
-- Long biased? (allocators prefer neutral)
-- What hold time, on average? (pertains to scalability)

 

[MrMuppet]

Look, if you can beat the results in question, why not just drop this guy an email?

I'd say that he probably knows more than all those muppets here on ET and while you underperformed the buy and hold approach, he probably still would be interested in case your results are uncorrelated with the broader market, because he's probably looking to blend different strategies together.

@lindq I'd take an uncorrelated low risk/consistent return approach any day. Who gives a fuck about beating the S&P, when a strategy is consistent and scalable? I don't. So as long as it's not just some kind of trend following approach, he should go for it, IMO.

 

[Soon2Bgreat]

Sharpe can be misleading. If he is doing 8% annualized with a max peak to trough drawdown of 1.5% that is really good.

I have a feeling that's probably a drawdown value from initial balance. Still good, just much different.

 

[newwurldmn]

Sharpe can be misleading. If he is doing 8% annualized with a max peak to trough drawdown of 1.5% that is really good.

I have a feeling that's probably a drawdown value from initial balance. Still good, just much different.

especially if its scalable, uncorrelated to the SPX, and doesn't have any skew in its pnl.

Drawdown is probably related to the fact that the overall market hasn't had a significant drawdown in his live trading period.

 

[Xela]

If he is doing 8% annualized with a max peak to trough drawdown of 1.5% that is really good.

This was my feeling, too.

I thought his figures (for all that there aren't nearly enough of them) looked distinctly better than most of the stuff rather naively asked about in forums.

I think a potential investor (which I'm not, by the way) would want to know the exact number of trades during the last 19 months for which "clean records" are available (and would probably want it to be higher than I'm guessing it is from the information above), and the MAE would be important to know, too ...

I have a feeling that's probably a drawdown value from initial balance.

I see ... maybe so. That didn't occur to me. Well, that relates in a way to MAE. (Still promising, but significantly different, as you say.)

 

[Manny Mendelson]

Hi to all commenters

Thanks for all of the input. I’ve enclosed a JPEG of the equity curve and some stats. Again, live trades, on IB, with “Portfolio Allocator” pdf available for the period when I started trading the strategy exclusively. I understand the comment about the “low drawdown market” in the trading period, but, actually, according to IB’s report, the max drawdown for the S&P was 5.09% and the strategy was 1.56% so even if you leveraged you might beat the S&P with lower drawdown. At any rate, I have contacted allocators with no replies. I might add that my position size is quite conservative and I am by no means using the entire bankroll of the account. I have plans to rationally increase that risk. As far as trading in an up market, I totally agree, however my backtests are always run from 1/1/2007 to try to stress test the strategy. Once again, any advice or comments are welcome.

 

[Van_der_Voort_4]

It's first time I read your post.
Would be interesting to know how your system performed since January?
Your consistency is really good,the only worry is these are "one way markets"

To me the PF is too high to think there is no skew to current market conditions
I respect the fact that you trading live,but the equity chart is fit to perfection,imho

I am still coding my system,I could have no losing 4 months period,no losing year on major futures or Forex calculated on single instrument,going back to 2002 and in the backtest equity chart has more frequent drawdowns and nearly flat periods.

Time spend in a drawdown imho is equally important as making money for obvious reason,sooner or later the bottleneck effect will come and systems with short periods in a drawdown prior to this are prone to give all money back,at worse to blow up.If the methodology is based on long bias it's not prepared for it.Currently it works,because entries are perfected as this is reflected in time spend in a drawdown.

You don't have too post this,but for your own good i suggest to backtest your system on Crude Oil futures

kind regards