Looking for momentum Check outside the US - adx forex trading system

Looking for momentum Check outside the US ~ adx forex trading system

Momentum vs. mean-reversion has been a perennial theme in investing, not least quantitative investing. My contention has always been that momentum strategies are generally less reliable than mean-reversal strategies. (See here or here.) My reader Mr. J. Rigg told me about a recent article in the Financial Times suggesting that momentum strategies are alive and well, according to the research by Prof. Elroy Dimson et al at the London Business School. The strategy is very simple: buy the stocks with the highest returns in, say, the last 12 months, short the ones with the lowest returns, and hold for, say, 1 month. If you run this strategy for the top 100 UK stocks from 1900 to 2007, the average annualized return before costs is about 10%.

There are, however, a number of caveats worth noting in this study:

First, it is very transaction-costly to implement momentum strategies for small or even mid-cap stocks. If you factor in costs, 10% can easily become 5% -- not an impressive number even for a dollar-neutral strategy. (Though one should note that the infrequent rebalancing renders transaction costs consideration less important.)

Second, the drawdown durations are quite lengthy -- sometimes exceeding 2 years. This is not acceptable performance for many hedge funds. Such lengthy drawdowns have been a common feature of many momentum strategies that I have personally studied and traded.

Third, and most interestingly, in the period 2001-2007, this momentum strategy has stopped working altogether for the US market, while continuing to deliver positive returns in other markets!

What may be the reason for this dichotomy between US and international markets? Momentum strategies generally derive their power from the slow diffusion and analysis of information: if all investors are simultaneously aware of all the relevant financial information about a company and can analyze the significance of the information instantaneously, they will have come to a consensus fair market value instantaneously and no momentum in the price will result. Hence perhaps the disappearance of momentum in the US equity market means what most people know already: that it is the most efficient equity market of all.
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Sorry your return is too high for us - forex trading strategies simple

Sorry your return is too high for us ~ forex trading strategies simple

I enjoyed reading Richard Wilsons The Hedge Fund Book (Richard also runs the Hedge Fund Blogger site). To be clear: it is purely marketing-oriented. It doesnt tell you how to find a successful trading strategy, but its focus is to tell you how to market your fund to investors once you have a successful strategy. To that end, it does a pretty good job in conveying what might be conventional wisdom to seasoned fund managers. (For e.g., dont bother to market to institutional investors if your AUM is less than $100M.) The book is filled with quite engaging interviews with fund managers, fund marketers, and other fund service providers (including our very own administrator Fund Associates). If Scott Pattersons The Quants is about the gods of hedge funds, this book is for and about the mortals.

One paragraph in the book stood out: "Ive worked closely on the third-party marketing and capital introduction/prime brokerage side of the business, and I often see both types of firms deny clients service [to funds with high returns and high risk] ... Nobody wants to be associated with a manager aiming at 30 percent a month returns."

Maybe not aiming at, but whats wrong with achieving a 30 percent a month returns? I have actually met institutional investors who dont want to look at a fund that actually achieved double-digit monthly returns. Presumably thats because they believe that a high return automatically implies high risk, and also presumably a high leverage as well.  I would argue that there are 2 reasons not to completely dismiss such funds out-of-hand:

1) Leverage should not be determined arbitrarily, but should be based on the minimum of whats dictated by half-Kelly (see my extensive discussions of Kelly formula on this blog and in my book) and whats dictated by the maximum single-day drawdown seen historically or in VaR simulations. And if this minimum still turns out to be higher than what most institutional investors are comfortable with, one should be bold enough to adopt it in your fund.

2) As an investor, there is an easy way to control leverage and risk: just apply Constant Proportion Portfolio Insurance (a concept also discussed elsewhere on this blog). For example, if the fund manager tells you the fund employs a constant 10x leverage (as dictated by the risk analysis outlined in 1) and you are only comfortable with 5x leverage, just invest half your capital into the fund, and keep the other half as cash in your bank account! Going forward, if the fund loses money, your effective leverage would have decreased to below 5x. Say you invested $1M into the fund, and kept $1M in the bank. And say the fund lost $0.5M. Your total equity is now $1.5M, and the fund manager is supposed to trade a $0.5M*10=$5M portfolio. Your effective leverage is now only 3.33x, well within your tolerance. Now if instead, the fund made money, you can immediately withdraw some of the profits to keep your effective leverage at 5x. So, say the fund made $0.5M. Your equity is now $2.5M, and the fund manager is supposed to trade a $1.5M*10=$15M portfolio. If you dont withdraw, this would increase your effective leverage to 6x. But if you immediately withdraw $0.25M, then the fund manager will trade a $1.25M*10=$12.5M portfolio, giving you an effective leverage of the desired 5x.

If you are an investor in hedge funds, please let us know what you think of this scheme in the comments section!
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How Forex Affects Us All - forex killer trading system

How Forex Affects Us All ~ forex killer trading system

by: Geri Mason


You may not be involved in Forex trading directly, but the fact remains that you are affected by what occurs in foreign exchange trading every day.

Here are some examples of how this constant flow of currency trading makes an impact on your daily life.

Perhaps the most obvious impact is that currency trading makes an impact on the price you pay for goods and services.

Should you happen to live in a country where the comparative value of your currency falls in comparison to that of other countries, you could find yourself paying a higher price for items that you are used to purchasing at a relatively inexpensive rate.

The reason is that the rate of exchange for imported goods would have changed and chances are the brunt of that change will be passed on to you, the consumer.

These goods may include anything from petroleum products to underwear.

Another way that changes in trading currency impact you is the simple ability to obtain goods and services.

A severe enough change in the rate of exchange could mean that it is no longer viable for certain types of business commerce to continue.

The result will be that you may find that some items that you are used to purchasing regularly will at first become much scarcer and carry a higher price tag, but ultimately no longer be available to you at all.

This will require you to change your spending habits and settle for other goods that you may consider being of lesser quality.

An extreme example would be if you were no longer able to get the imported car parts you need for your vehicle and had to turn to either generic replacements or used parts.

Your investments may also be impacted as well.

While the stock exchange is a totally different process from currency exchange, the fact of the matter is that they do impact one another.

Adverse changes in the rate of exchange can mean your stocks may slow down their process of earning money for you, especially if the stocks happen to be investments in retail companies or any entity that relies heavily on foreign trade.

Changes in your portfolio of course make a difference to your overall financial health, and may especially hurt if your stock portfolio happens to also be your form of retirement plan.

Many people do not give the trading of currency a second thought. Nevertheless, this process that is in a constant flow every day does reach out and touch the lives of each of us in some way. We may find ourselves paying higher prices for goods or services that we are used to enjoying.

In some cases, we may have to substitute for a lesser product, due to lack of availability. We may see our overall financial health impacted, even to the point of wondering about our future and retirement. Keeping up with Forex trading is a good idea for all of us.

It should be noted Forex trading involves substantial risk of loss and is not suitable for all investors.
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