So another quarter has come and gone and I am pleasantly surprised and pleased to let all of you know that the fund is not only still in operation, but also prospering. Investors are happy (for now) and I have learned many new things since my last post that I will share with you now.
Many significant and even some unprecedented events have occurred over the last several months (downgrade of US credit, potential government shutdown, European financial troubles, etc.) creating a highly volatile market in which we had 4 back to back days of 400 point moves or greater in the Dow. Many hedge funds and banks have shutdown.
I view turbulent periods such as this as an opportunity to demonstrate the effectiveness of my trading methodology to myself and my investors. Of course I have experienced times like these prior to starting my fund, but never as an established incubator fund under the watchful eyes of investors. I monitored my metrics closely and the system behaved exactly as it was intended. My confidence in the methodology has grown and reinforces my stupidity and regret in early trades in which I made trades outside of my system (style drift). I have not done it since and I will never do that again!
One of the biggest lessons I have learned over this past year is the differences between being a trader and a portfolio manager. Prior to establishing the fund, I spent over a decade as a trader, more so (in hind sight) a gambler. I was not worried about hedging, consistent performance, or accountability because I was only responsible to myself. I have always been in highly risky occupations and so I never thought much about risk. When I became serious about trading (my day trading experience) and did it full time for a year and a half and blew out my account several times, I quickly learned to value risk management over profits (a tectonic shift in my thinking). The system I trade now is a product of that epiphany.
Now as a portfolio manager, I spend a lot of time measuring volatility, correlation and the balance between risk management and profits. For example, for the first three years I traded my trading methodology, I limited its trading only to the Nasdaq 100 equity index (QQQ or QQQQ at the time). I did this because I only had a small amount of trading capital and also because I was getting great results. The problem was that I wasn't hedged and was highly vulnerable. So when I started the fund I made the natural decision to apply the trading model to multiple markets. In fact, I thought, the more the better. I ended up trading 11 different indices (DBC, DIA, EEM, FXE, GLD, IWM, QQQ, SPY, TLT, USO, UUP). Well, I was successful in hedging to the point that the fund effectively remained flat regardless of what the market was doing. This was not good. As it was, I was trying to earn back the money I lost on the style drift trades I made when the fund first started (which I mentioned earlier). My fund was remaining flat while its benchmarks (QQQ, DIA, SPY) were rocketing upward.
In early February I made the decision to restrict my trading to only 4 indices consisting of DIA, QQQ, TLT, and GLD. This was one of the most important decisions I have made so far because my fund's performance immediately began to change. While correlation with the major indices and my fund remained low (an average for all three benchmarks of roughly .27), my fund immediately began making money and has been consistently doing so since that time. In fact, as of yesterday I have made back all losses since the fund's inception.
Position sizing has also become very important in my portfolio management efforts. Within those four indices, I am finding optimum sizes based on what the market is doing and how much I have invested in each index relative to available cash.
Earlier I mentioned metrics. One of my biggest regrets is that I did not start tracking my fund's performance on a day by day basis when I first started the fund. When I realized how important it was to have this data, I went to my broker (Optionsxpress) and asked for them to provide it, but they do not maintain that data. There have been a few other instances of needs I have had that were unable to be met by this broker and this underscores what a hedge fund oriented broker can bring to the table.
In my last post I mentioned that I was developing some trading signals that showed promise in early testing. Unfortunately, they did not make it favorably past the backtesting and once again, I am glad I waited until using real money (even in small amounts). These lessons may seem simple and even obvious, but it is one thing to know and quite another to do!
At this point, I continue to work to grow my distribution list for when I send out my quarterly reports. The distribution list, ET and Linkedin are my primary methods for networking and getting the word out about my fund without advertising. For the most part, responses have been favorable and I have been successful in attracting some interest.
I have come to realize that it is important for a fund manager to be able to understand exactly whom his potential client his. Based on the long term perspective and steady, consistent returns of my fund regardless of market conditions, it is becoming obvious to me that my potential investors are conservative family offices, pensions and endowments. This is not good or bad, it is just what it is.
This is a lot of info so I'll stop here. Thank you for taking the time to read this thread. I wish you all continued success in the markets and in your personal lives.
