A candid view why strategies have stopped working.

[Nick Radge]

A good article with interesting insights as to why many hedge fund style strategies, including trend following, momentum and mean reversion, have been struggling over the past several years. Summary of causes:

Passive Indexing: ‘edge providers’ have moved aggressively into passive index funds and broader market ETFs. As such, we have a condition amongst the traditional quantitative strategies whereby we have robots trading against robots. Without a steady source of ‘edge providers’, these ‘edge demanders’ are just trading money back and forth with each other. We believe increased quantitative trading coupled with passive indexation by retail, and, low levels of realized and implied volatility may be creating a feedback loop that has caused unusual price movements in a variety of securities that have challenged trading oriented strategies.

Volatility: All active trading strategies require volatility to create an opportunity set. Without volatility, trading oriented strategies cannot make money. Both implied and realized volatility in mainstream markets have been some of the lowest in recorded history. I read a statistic that the VIX closed below ten on eleven occasions in the past 20 years. Seven of those eleven days have been over the past two months.

https://www.linkedin.com/pulse/turmoil-quant-land-hedge-funds-candid-view-why-strategies-knab/

[LEONARDZIR]

Nick,
Do you think we should stop trading mean reversion systems/MOC based on your observations?
Certainly my MOC is dead in the water. What is moving for me is my rotational momentum systems and my passively held. VTI(in my retirement accounts)

[Nick Radge]

Quote:

Do you think we should stop trading mean reversion systems/MOC

That’s the natural line of thought isn’t it?

And in my experience you’re first thought is usually the wrong thought.

Rather than stop trading MOC or MR I would be inclined to either scale them back or take a ‘watch and wait’ view and enable them again once volatility returns.

Volatility is secular and it will just be a matter of time before it returns again.

My guess is that these passive ETF buy and hold investors will have considerable remorse again when another crisis hits. We’ve lost a few subscribers from The Chartist who suggested that they make more money just doing buy and hold.

In my opinion they either have short memories or have no historical persepctive. They WILL be caught out again, just like people were in 2008, 2002, 1999 and every bear market prior.

[LeeDanello]

Len Zir wrote:

Nick,
Do you think we should stop trading mean reversion systems/MOC based on your observations?
Certainly my MOC is dead in the water. What is moving for me is my rotational momentum systems and my passively held. VTI(in my retirement accounts)

Len it just means you’ve got to get smarter. Maybe we need to be more market specific and target new technologies, new materials. The world is rapidly changing so there’s got be new opportunities out there.

[LEONARDZIR]

Nick,
Scaling back or watching and waiting seems like a really major move but worth considering. What would you follow to know when it would be profitable to start trading my mean reversion systems.?
Also an observation. I own a considerable amount of VTI in my retirement accounts. However it is not a really passive holding. I am using a filter similar to one I use in my rotational strategies to sell VTI.

[Nick Radge]

Quote:

Scaling back or watching and waiting seems like a really major move but worth considering. What would you follow to know when it would be profitable to start trading my mean reversion systems.?

Just for the record I won’t be. It tends to fall into the category of ‘I want o trade my system only at the optimal times’ which is something that, I believe, is not possible or practical.

I would take the down time to look at some type of improvement, such as a volatility filter, either on the stocks or the index itself.

However, that comes with caveats as well, specifically curve fitting.

Remember the old saying that your mind will do everything it can to unsettle your trading. Is this just short term noise? Or is it a new normal?

Quote:

I own a considerable amount of VTI in my retirement accounts. However it is not a really passive holding. I am using a filter similar to one I use in my rotational strategies to sell VTI.

Yep. Good idea.

[LEONARDZIR]

Thank you Nick. Since I haven’t the foggiest idea when is the optimal time to trade my MOC strategy I’ll continue to plug along..

[ScottMcNab]

Better keep MOC systems going…2017 is a year that ends in …..7 !!!

http://bettersystemtrader.com/123-will-history-repeat-in-2017/

hmmm…

[JulianCohen]

Scott McNab wrote:

Better keep MOC systems going…2017 is a year that ends in …..7 !!!

http://bettersystemtrader.com/123-will-history-repeat-in-2017/

hmmm…

Yeah I listened to that too yesterday. After the next two years we’ll all be rolling in it!

[Nick Radge]

Penfold is in his 3rd of 4th iteration of trading systems due to data mining….seems like nothing has changed with this insight.

[ScottMcNab]

1997,2000,2007,2010 all great years for my long only rotational systems

I was half expecting him to say that works even better if only trade Tuesdays in years the systems is short and Wednesdays in years go long

[LeeDanello]

Is he truly systematic?

I get a hint of some discretion in there?

[ScottMcNab]

I think in testing this particular 100+ year repeating theory it was all systematic but I haven’t actually gone and looked at his website…it did sound very Larry Williams like

[RobGiles]

I can’t help but think that trading these short term MR systems is an exercise in going head to head with the best quant minds in the business, and therefore unlikely to yield profits over the long run, as they are clearly getting arbitraged away. As discussed elsewhere in the forum, they are also inherently very risky if you’re trading them with 2 or 4 times leverage (the fact that fat tail events can occur means your account could blow up in 1 session), however the people you are competing against don’t give a toss about the asymmetric risk profile of these trading systems. If the algo trader for a firm blows up his account, he loses his job. If we get hit with a fat tail event, we lose most of trading capital. As that eventuality is unlikely (been a long time since we’ve had an ’87 crash), the firms they work for are happy to accept the consistent profits they make so my guess is that we’ll be competing against them into the foreseeable future.

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