Market Neutral Trading / Securities

thx man for answer.

My information on LTCM is based on
"Hedge Funds" Die Köngisklasse der Investments by Marcus Friedrich /Dietmar H. Bahr published by FinanzBuch Verlag
p 38 - 51

and

Roger Lowenstein, When Genius failed p 234 ff

Maybe my statements are wrong because I do not understand the whole swap rates futures options russia deutschbank Ubs deals fully that LTCM was in at the time.

Thanks for the ways to calculat other RR Numbers. I have to spend a few hours to work on that and how to calculate this things.



A few questions on that if you don't mind answering:


Can you reffer to any sources for neutral investing books links funds or what ever.


Wher is the unusual risk? When I am trading over weighted long short the risk is clear. That tomorrow T GM GE ABT AA MRK XOM UTX to only mention a few are worth 0 or double of the price today. This will happend very improbably but can be.
Where is it on neutral? That exact the 10 I am long are worth 0 and the 10 I am short double???? or anything else?


What do you trade in your office? Mostly pairs or strong weak stocks within an specific index. Or the other one with the future or warrant to the opposite side of the securities you are holding?


Who are the big players in the MN business to compare with?
I found a few names and firms who are listed at hedgefundindex. Any speacial one out there to take a look on?
 
Quote from NYSEtradinglog:

thanks for all your input

AmbushHillbilly

Thanks for you personal experience. Do you trade on fundamentals, technical indicators or a mix of both? Systematic or with discretion?

3% a month is amazing.

Interesting your experience on up and downs of the market appreciate it.


good trading all
More...

After I replied I checked the theoretical returns for April. They were very poor (negative) and dropped the overall strategy to 2.3% per month. This still sounds good, but I can make near that with intraday strategies without tying up capital for long periods of time.

I trade technically, especially looking at relative strength vs. the S&P as the main filter. I used a couple of hard filters, but after that it was discretionary.

Take the 3% with a huge grain of salt. That was only over a few months. I knew my 'strategy' had several wekanesses and April brought them out.
 
I don't think market neutral is working right now, nor has it worked for the past few months straight. If you are using this with big leverage you are skating on thin ice.
 
Market Neutral works well in momentum market. Check out its Beta from 1995-1998. But this is not taking into account, tick-rule. Shorting for day trading is a bitch and can render most market-neutral strategy useless or at the very least biased towards the skewed side.

For sideway markets, its alpha and Beta are negative. A huge no-no. There was a trader/professor by the name of Thomas Hessa, who used an ARMA selection algorithm for day-trading market-neutrality. He was up huge during the bull run but was whipped out in the last couple of years. I think Futures ran an article about him...

Moral of the story:
Tailored strategies depending on the market.


P.S. On another note: most "advertisement" of market neutral systems/advisory are fraudulent. How do I know, I used to work for one. :(

On a different note: LTCM used option-pricing as opposed to day-trading market neutrality. Apples and oranges.
 
I don't think market neutral is working right now, nor has it worked for the past few months straight. If you are using this with big leverage you are skating on thin ice.
More...

This is such a difficult discussion, because there are a myriad of market and delta neutral strategies. Including convert arb, long-term mkt neutral, intraday mkt neutral (2 totally different games), risk arb, stat arb, delta neutral options, etc. etc.

And depending on your individual approach to any of these, you could end up with totally different results....

At any given time one or more of these may be working, and one or more of these may not be working (e.g., risk arb doesn't work so well when there are no deals!).

Like anything else in trading, if your strategy isn't good, just being market neutral isn't going to make you money...and like everything else in trading...you have to have an edge. Whether it is correctly betting on credit spreads, yield curve shifts, stock momentum, or selling time value or volatility.

The premise of this thread I believe referenced CSFB Tremont's Equity Market Neutral portion of their hedge fund index. I would venture to guess that most of these funds are longer term in nature or are stat-arb. They probably represent larger hedge funds, and these funds are probably moderately leveraged. As the original poster mentioned, the equity curve is suprisingly smooth. The curve may not be characteristic of what everyone on ET thinks as being ideal, but it is exactly what big institutions are looking for, and it is where they will put their money. So, if you can replicate a curve like that with a market neutral approach, kudos. You should be running $100+ MM in a few years.
 
Thanks guys for all your responds

Like anything else in trading, if your strategy isn't good, just being
market neutral isn't going to make you money...and like everything else
in trading...you have to have an edge. Whether it is correctly betting
on credit spreads, yield curve shifts, stock momentum, or selling time
value or volatility.
More...

Yea thats the risk that my strategy is over optimized or for any other reason
do not work further in the future. It's the same as in other styles.

The curve may not be characteristic of what everyone on ET thinks as being
ideal, but it is exactly what big institutions are looking for, and it is
where they will put their money.
More...

My experience with institutions is that they first look on the RISK
and second on the sharp ratio or a smoothing equity curve.

When you are trading short term ES or NQ with amazing RR number for a year or
two and a overnight gap or an intermediate rate cut intraday as we saw in 2001
hit you 25 - 50% then you will have hard times to raise up a cent or two.

My current problem is that I cant keep tight stops in trading EOD stocks as the slippage
is to high. So I trade form close to close. With a protective stop far away but hit only
a few times a year.

I do diversify in 3 systems but the RISK is still to high and when I am full short packed
whith one side a big gap in the other way can break my neck.

So there are two reason for me to work on neutral.

1st Due Diligence Questionnaire must be looking great on the question of risk when you
can say - He I'm neutral.

2nd Insitutions are indeed very horny on successful "Market Neutral Trading"





I've done a few tests yesterday and will post up my experience and some numbers tomorrow
when I'm back to office.

So far It's much harder then the first lucky test has shown.


good sunny sunday

http://weather.yahoo.com/forecast/ITXX0080.html
 
Quote from FishSauce:

Market Neutral works well in momentum market. Check out its Beta from 1995-1998. But this is not taking into account, tick-rule. Shorting for day trading is a bitch and can render most market-neutral strategy useless or at the very least biased towards the skewed side.

For sideway markets, its alpha and Beta are negative. A huge no-no. There was a trader/professor by the name of Thomas Hessa, who used an ARMA selection algorithm for day-trading market-neutrality. He was up huge during the bull run but was whipped out in the last couple of years. I think Futures ran an article about him...

Moral of the story:
Tailored strategies depending on the market.


P.S. On another note: most "advertisement" of market neutral systems/advisory are fraudulent. How do I know, I used to work for one. :(

On a different note: LTCM used option-pricing as opposed to day-trading market neutrality. Apples and oranges.
More...
I concur 100% (although LTCM was in all kinds of plays, not all options, and the short tick rule is not much of an issue with bullets, except for commissions)

Somehow, ALL of trading is identifying "what" kind of market we are in, even for discretionary traders - our "rules" appear to bias one way of trading or another and the rules that are NOT in our "conciousness are also a bias against that direction. In addition, it seems that identifying what kind of market we are in is a fractal statement in nature about the success of all traders - it appears to affect all traders on all time frames in one way or another.

I have implemented "market neutral" (2-way pair trading, both convergent and divergent) trades in the past with great success. However, my way of thinking was totally ignorant of the "kind of market" we were "in." Once it changed, from whatever it was to whatever it is, I started loosing money.

I would be interested in the Thomas Hessa paper. Any links?

nitro
 
No .. sorry no link. I have been digging through some old Future Magzine and have yet to find it. I know he made an appearance on CNBC awhile back.

I think Kaufman in his Trading system book also mentioned a similar person. Might be the same person but I am not too positive.
 
Ok. I've done a week testing indeas of equity market neutral trading.

It's far not that easy as I thought at the beginning.

The whole thing stand and fall with the calculation of relative strange and weakness to the Index the stocks are in.

The best thing I found so far is a very simple calculation of the last 5 days high low and close in percentage relation to the Index.

Holding period is around 1 - 4 days.
5 - 10 stocks in each direction.

Long only gave an amazing result. Draw Down a little bit high - but on an average 1200 - 1800 % with a draw down of 30 - 40 % for the last 10 years.

Adding short trading reduce the return down to the half. Drawdown stand on an average of 20%.

I used the same calculation for short trading as for long.

I've got this results trading DIA and SP100:

sp100neutraltray.gif


downeutraltry.gif


The performance is made in the super volla years 1998 - to now. Bevore 1993 you can forget the whole system. Both long and short are losing money.

Ergo: I will put this into trash - not tradeable as I don't think we can hold up this good Close to Close volla that we have had over the last 8 years.

My next steps would be to increas holding period and adding fundamentals in my research....

good trading all
 
The last two years in market neutral strategy trading confirm the critical view on this kind of trading. Nevertheless, the basic concept has some validity IMO.
I think one of the big tasks is to identify what drives a strategy and what hurts a strategy and then try to forecast these environmental forces. Concepts like dispersion are crucial to many market neutral strategies IMO.

Another interesting thing is that even in the bear market many market neutral strategies earn more money on the longs than on the shorts. This is naturally even more the case in bull markets. I think there are very few people who really make consistent money shorting stocks. I know one operation in California running a fund called Ursa who traded a Sharpe Ratio of almost two exclusively shorting stocks within the bull market of the nineties.


peace
 
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