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PureBytes Links
Trading Reference Links
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Pay attention to new investment instruments called "Hedge Fund Replicators."
In spite of many advantages, it is perhaps premature to invest in them,
but it is now the best time to study them.
One possible start is to download a paper by Harry M. Kat (Cass Business
School, City University, London, published in March 2006, 26 pages) from
this web site: http://www.cass.city.ac.uk/airc/papers.html
Minimum amount required for hedge fund: $1 million or more up front,
fees = 20% of new profits, money locked for at least one year.
One of new "replicator" funds for individuals is Rydex Absolute Return
Strategies Fund, http://www.rydexfunds.com/campaigns/newrydexfunds.htm
Minimum amount required for this replicator fund: $2,500,
fees = 1%, you can unload shares at any time
Some replicators are using so called "mechanical trading rule approach", for
example Merrill Lynch Equity Volatility Arbitrage Index, the Merrill Lynch
FX Clone, the Deutsche Bank Currency Return Index, and the Bear Stearns
"Mast" (Fixed Income). Partners Group's ABS Index "is a collection of
18 mechanical rules-based strategies".
DC
----- Original Message -----
From: DC010225
To: omega-list@xxxxxxxxxx
Sent: Monday, December 31, 2007 6:02 AM
Subject: Re: "The Sharpe Engine" My 2008 project
Answer to cwest:
System A and B have the same profit and the same SR. However, System A is
superior to system B. For example, in Figure 18-1(a) System B has much
larger drawdown than system A.
Note: If you want to be a successful trader, you need books by Kaufman and
Jack D. Schwager.
Let's talk briefly about two cases:
A. Case of newbie trader:
He opens $5,000 account and starts day-trading stock index futures. After
series of small losses, his account balance drops to $2,500.
However, he is lucky, his indicators start working again, and he is
experiencing a series of wins bringing his account finally to $10,000 level.
He declares a victory (for his system similar to system B in Fig. 18-1a) ,
and drunken with success he explores a myriad of performance measures.
All these measures look the same to him. However, SR was developed by
academia, is described in many books, and has a lot of nice features,
so he is stuck with SR.
B. Case of experienced trader:
After trading for 20+ years, his account balance exceeds $1 million. System
B used by newbie trader is absolutely not acceptable to him. A possibility
of $1M profit is very tempting, but a loss of $500K could be devastating to
his retirement plan. SR measure is useless to him, it can serve only as
a starting point of evaluation.. He has to change his attitude in two areas:
B1: He has to utilize (or invent on his own) performance measures
de-emphasizing large gains and paying a special attention to pains /
drawdowns.
B2: The most of trading approaches (for example trend following systems
applied to a large portfolio of futures markets with sophisticated position
sizing) will not meet his performance criteria -- they suffer with too large
drawdowns. He has to discover and use methods offering steady gains and
minimum drawdowns in all market conditions (up, down, sideways). Such
methods exist, for example Options trading.
So, depending on who you talk to, newbie vs. veteran, you have two very
different perspective on trading and performance measures.
DC
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