Volatility ETF Trader – June 2017: +15.3%

The Volatility ETF Trader product is an algorithmic strategy that trades several VIX ETFs using statistical and machine learning algorithms.

We offer a version of the strategy on the Collective 2 site (see here for details) that the user can subscribe to for a very modest fee of only $149 per month.

The risk-adjusted performance of the Collective 2 version of the strategy is unlikely to prove as good as the product we offer in our Systematic Strategies Fund, which trades a much wider range of algorithmic strategies.  There are other important differences too:  the Fund’s Systematic Volatility Strategy makes no use of leverage and only trades intra-day, exiting all positions by market close.  So it has a more conservative risk profile, suitable for longer term investment.

The Volatility ETF Trader on Collective 2, on the other hand, is a highly leveraged, tactical strategy that trades positions overnight and holds them for periods of several days .  As a consequence, the Collective 2 strategy is far more risky and is likely to experience significant drawdowns.    Those caveats aside, the strategy returns have been outstanding:  +48.9% for 2017 YTD and a total of +107.8% from inception in July 2016.

You can find full details of the strategy, including a listing of all of the trades, on the Collective 2 site.

Subscribers can sign up for a free, seven day trial and thereafter they can choose to trade the strategy automatically in their own brokerage account.

 

VIX ETF Strategy June 2017

Futures WealthBuilder – June 2017: +4.4%

The Futures WealthBuilder product is an algorithmic CTA strategy that trades several highly liquid futures contracts using machine learning algorithms.  More details about the strategy are given in this blog post.

We offer a version of the strategy on the Collective 2 site (see here for details) that the user can subscribe to for a very modest fee of only $149 per month.  The Collective 2 version of the strategy is unlikely to perform as well as the product we offer in our Systematic Strategies Fund, which trades a much wider range of futures products.  But the strategy is off to an excellent start, making +4.4% in June and is now up 6.7% since inception in May.  In June the strategy made profitable trades in US Bonds, Euro F/X and VIX futures, and the last seven trades in a row have been winners.

You can find full details of the strategy, including a listing of all of the trades, on the Collective 2 site.

Subscribers can sign up for a free, seven day trial and thereafter they can choose to trade the strategy automatically in their own brokerage account, using the Collective 2 api.

Futures WealthBuilder June 2017

Futures WealthBuilder

We are launching a new product, the Futures WealthBuilder,  a CTA system that trades futures contracts in several highly liquid financial and commodity markets, including SP500 EMinis, Euros, VIX, Gold, US Bonds, 10-year and five-year notes, Corn, Natural Gas and Crude Oil.  Each  component strategy uses a variety of machine learning algorithms to detect trends, seasonal effects and mean-reversion.  We develop several different types of model for each market, and deploy them according to their suitability for current market conditions.

Performance of the strategy (net of fees) since 2013 is detailed in the charts and tables below.  Notable features include a Sharpe Ratio of just over 2, an annual rate of return of 190% on an account size of $50,000, and a maximum drawdown of around 8% over the last three years.  It is worth mentioning, too, that the strategy produces approximately equal rates of return on both long and short trades, with an overall profit factor above 2.

 

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Low Correlation

Despite a high level of correlation between several of the underlying markets, the correlation between the component strategies of Futures WealthBuilder are, in the majority of cases, negligibly small (with a few exceptions, such as the high correlation between the 10-year and 5-year note strategies).  This accounts for the relative high level of return in relation to portfolio risk, as measured by the Sharpe Ratio.   We offer strategies in both products chiefly as a mean of providing additional liquidity, rather than for their diversification benefit.

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Strategy Robustness

Strategy robustness is a key consideration in the design stage.  We use Monte Carlo simulation to evaluate scenarios not seen in historical price data in order to ensure consistent performance across the widest possible range of market conditions.  Our methodology introduces random fluctuations to historical prices, increasing or decreasing them by as much as 30%.  We allow similar random fluctuations in that value strategy parameters, to ensure that our models perform consistently without being overly-sensitive to the specific parameter values we have specified.  Finally, we allow the start date of each sub-system to vary randomly by up to a year.

The effect of these variations is to produce a wide range of outcomes in terms of strategy performance.  We focus on the 5% worst outcomes, ranked by profitability, and select only those strategies whose performance is acceptable under these adverse scenarios.  In this way we reduce the risk of overfitting the models while providing more realistic expectations of model performance going forward.  This procedure also has the effect of reducing portfolio tail risk, and the maximum peak-to-valley drawdown likely to be produced by the strategy in future.

GC Daily Stress Test

Futures WealthBuilder on Collective 2

We will be running a variant of the Futures WealthBuilder strategy on the Collective 2 site, using a subset of the strategy models in several futures markets(see this page for details).  Subscribers will be able to link and auto-trade the strategy in their own account, assuming they make use of one of the approved brokerages which include Interactive Brokers, MB Trading and several others.

Obviously the performance is unlikely to be as good as the complete strategy, since several component sub-strategies will not be traded on Collective 2.  However, this does give the subscriber the option to trial the strategy in simulation before plunging in with real money.

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Algorithmic Trading on Collective 2


Regular readers will recall my mentioning out VIX Futures scalping strategy which we ran on the Collective2 site for a while:

 

VIX HFT Scalper

 

The strategy, while performing very well, proved difficult for subscribers to implement, given the latencies involved in routing orders via the Collective 2 web site.  So we began thinking about slower strategies that investors could follow more easily, placing less reliance on the fill rate for limit orders.

Our VIX ETF Trader strategy has been running on Collective 2 for several months now and is being traded successfully by several subscribers.  The performance so far has been quite good, with net returns of 58.9% from July 2016 and a Sharpe ratio over 2, which is not at all bad for a low frequency strategy.  The strategy enters and exits using a mix of  limit and stop orders, so although some slippage is incurred the trade entries and exits work much more smoothly overall.

Having let the strategy settle for several months trading only the ProShares Short VIX Short-Term Futures ETF (SVXY)we are now ready to ramp things up.  From today the strategy will also trade several other VIX ETF products including the VelocityShares Daily Inverse VIX ST ETN (XIV), ProShares Ultra VIX Short-Term Futures (UVXY) and VelocityShares Daily 2x VIX ST ETN (TVIX).  All of the trades in these products are entered and exited using market or stop orders, and so will be easy for subscribers to follow.  For now we are keeping the required account size pegged at $25,000 although we will review that going forward.  My guess is that a capital allocation should be more than sufficient to trade the product in the kind of size we use on the Collective 2 versions of the strategies, especially if the account uses portfolio margin rather than standard Reg-T.

With the addition of the new products to the portfolio mix, we anticipate the strategy Sharpe ratio with rise to over 3 in the year ahead.

 

 

VIX ETF Strategy

 

The advantage of using a site like Collective 2 from the investor’s viewpoint is that, firstly, you get to see a lot of different trading styles and investment strategies.  You can select the strategies in a wide range of asset classes that fit your own investment preferences and trade several of them live in your own brokerage account.  (Setting up your account for live trading is straightforward, as described on the C2 site).  A major advantage of investing this way is that it doesn’t entail the commitment of capital that is typically required for a hedge fund or managed account investment:  you can trade the strategies in much smaller size, to fit your budget.

From our perspective, we find it a useful way to showcase some of the strategies we trade in our hedge fund, so that if investors want to they can move up to more advanced, but similar investment products.  We plan to launch new strategies on Collective 2 in the near futures , including an equity portfolio strategy and a CTA futures strategy.

If you would like more information, contact us for further details.