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Interesting Job Posting

admin — Tue, 31 Aug 2010 15:19:12 +0000

I saw this post on a job portal, stating its unlimited funds. Sounds very interesting, because I can immediately start my own hedge fund, and basically start my own business.

Seems like there’s just too much demand from the wealthy people around, but little supply of good fund managers:

Are you a portfolio manager with a strong track record, looking to work in an autonomous hedge fund environment where you can implement your strategy and make a contractual % (cash).

My client is a multibillion dollar hedge-fund that operates a multi-strategy approach. They provide capital and infrastructure and help successful hedge fund managers to make the move into running their own fund.

The autonomy in running your own business unit removes the politics of working within a larger organization. They do not micro-manage and based on your risk limits provide you the freedom to trade your strategy and concentrate on performance rather than internal bureaucracy. They offer contractual % deals on your P&L – between 15 – 20 % and unlimited access to capital allowing successful strategies to ramp up rapidly.

The Task:

* Manage your own portfolio and business unit. This is a fully independent platform and although they have infrastructure and a platform, you will need a clear business plan around strategy and how to execute that strategy.

Min Criteria:

* You must be currently trading your strategy with a target of at least $10m+ for 2010.
* Historical track record generating P&L north of $10m+ in 2009 & 2008.
* Realised sharpe of at least 2+
* A clearly defined market neutral strategy that trades liquid products.
* Must be able to build your own business and have a credible plan to get the strategy up and running with a clear business plan and credible idea of how scalable the strategies are (i.e. market impact).
* Max Draw Down of -7% in a month.

I am also glueing my eye on the market neutral strategy required by the fund supplier. Hmm.

How to measure Alpha of your portfolio / fund

admin — Sun, 22 Aug 2010 15:12:39 +0000

I was trying out the models developed by hedge funds, their strategies and portfolio management style. Applying their model onto my fund was already a challenging task, since I am a one-man resource.

Then I started thinking of measuring my performance. As a common phrase, you can’t manage and improve what you cannot measure. So I started to look at measurement metrics, and after going through tons of hedge fund books, I’ve found the term “Alpha” which also signify how well a fund perform in returns. It is also how the website Seekingalpha.com got its name after. ( And thanks to the book “The Quants” for giving me such knowledge.)

Now the main aim of the fund is to seek positive Alpha, and with a good Alpha, a fund manager can demand higher management fees ie. 1.5%, 2%per year of the total invested Capital. Well, getting better at Alpha remains a Mystery (kudos to Citadel who has the answers)

Now just how do we calculate Alpha ?

We need a few inputs, this gets a little mathematical~

- Returns / Gain in %
- Interest rates in %
- S&P500 returns in % (YTD, Monthly, quarterly etc) and depending on what index you want to – bench mark with
- Overall portfolio beta in value

To calculate returns %
Take your realized profits minus starting capital to percentage points. (since the date you want to measure)

To get interest rates %
Simply look at the Fed rates.

To get Index Returns %
Take the up to date value over the starting index, to percentage points. (since the date you want to measure)

To get Overall Beta in value
Browse at finance.google.com and get its beta for each and individual stock, add all of them up and average them out.

And heres the formula:
Alpha = Return% – Interest rates% – (S&P500% * 2)

Eg:
- Returns = 24%
- Interest rates = 2.0%
- S&P500 returns 12%
- Beta = 0.78%

Alpha = 24% – 2% – (12*0.78)
= 22% – 9.36%
= 12.64 %

Walla, your total Alpha to this date for your fund is 12.4%, and you can mostly charge your clients a good management fees if you can generate this returns over any market conditions.

Another example:
- Returns = 4%
- Interest rates = 1.0%
- S&P500 returns -9%
- Beta = 1.4%

Alpha = 4% – 1% – (-9*1.4)
= 3% – (-12.6%)
= 15.6 %

Wow not bad if your fund is able to get a 4% returns when the markets dropped a huge 9%.

Hope your calculate your own portfolio’s Alpha and compare it with the professionals!

Declining share price of BAC – Bank of America Corporation

admin — Tue, 17 Aug 2010 15:04:00 +0000

Some Technical Analysis Background on BAC:

As of this writing, at this minute, the share price of Bank of America Corporation remains at $13.17

The share prices of Bank of America Corporation (Public, NYSE: BAC) had been dropping since the high of $19.864 on April 15. If you pull up the charts, since the April crisis where the high volatility has started, its shares hasn’t stabilized, until today. The share price has risen slightly today, after 3 days of tight trading range. It has also formed a very nice Christmas Tree since Feb 2010 this year.

Fundamentals:
And if you ask for the reasons, partly was the crisis in April brought in by BP, Earnings Season of Q2 losing out to Q1, and the Euros Crisis. What’s worst was the Q3 Earnings for Bank of America, which was weaker than expected, compared to Q1 and Q2. This casued the price to drop, gaped down, after rallying in speculation.

And now for my analysis, both on TA, FA, and QA on the predicted movements of BAC.

The share price for BAC has dropped quite alot, breaking through the support @ $14 year end 2009. Too many Shorts perhaps, no one wants to take a big part of it. I think it will stay around the range of $12- $14+. As long as the economy and the Fed doesn’t improve and increase the rates, its shares will hardly be moved.

To quantitatively hedge against this drop, I suggest shorting BAC shares to a minimum of $12 (that’s just $1), and Long any Financial Index ETF (Will cover this set of leverage instruments in my upcoming posts) I will suggest a 80% short while 100% Long, so the risk beta is lowered. But that’s just my view, use at your own risk!

Finally, I would stay put, and wait for further information before betting my stake at it.

Disclaimer: I do not own any BAC shares, but I am looking forward to own one.

How to hedge Commodity Oil Prices with ETF UCO and SCO

admin — Sat, 24 Jul 2010 02:12:28 +0000

A hedge happens when you are Long and Short positions within financial markets, thereby canceling any market risk. In this case, we are interested in Light Crude oil prices, and looking to use ETFs (that tracks and correlates the Oil prices) to find a good hedge and profit from it.

The following Stock is a product of ProShares Trust ProShares Ultra/Short DJ-UBS Crude Oil, a little description from Google’s finance site:

Description
ProShares UltraShort DJ-UBS Crude Oil (the Fund), formerly known as ProShares UltraShort DJ-AIG Crude Oil, seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of The Dow Jones—UBS Crude Oil Sub-Index (the Index). The Index, a sub-index of DJ—UBS Commodity Index, is intended to reflect the crude oil segment of the commodities market. The Index consists of futures contracts on crude oil only. The Index is valued using the settlement prices for the underlying futures contracts.

The hedge occurs when we are Long a stock ticker UCO for long direction for Crude Oil prices and Long a stock SCO for invest short position for Crude Oil prices

Before you begin this please look at the simplest dumbest way to use ETFs to trade, in case you haven’t know what UCO and SCO these 2 symbols means.

UCO = Prices goes up when Oil prices goes up
SCO = Prices goes up when Oil prices goes down

This strategy involves averaging up and/or down, and clear with the use of leverage/inverse leverage of ETFs. Added to the advantage is both ETF are 200% leverage, meaning if you had $1000 in UCO, a 1% increase in Light Crude prices equates roughly 2% for stock price of UCO. The same happens for SCO, or if you decided to short UCO.

Assuming Oil prices moves fluctuates to high and lows in a 5-10 day period, in these examples we do not care what are the oil prices, but instead go by percentage points.

Let’s give 2 hedging scenarios:

1) Oil moves lowest point.

UCO = $9
SCO = $16.66

Long UCO
100 x $9.00 = $900

Oil then moves up 5%

This causes UCO to go up 5% (200% = 10%), now @ $9.90

This causes SCO, to drop 5% (200% = 10%), now @ $15.

Long SCO
100 x $15 = $1500

Portfolio:
$0.90 x 100 = $90 Profit from UCO
$0.00 x 100 = $0 Neutral from SCO

Now you have a “perfect” hedge, because any movement in Oil prices will allow you to gain in both stock prices, or to cancel out any losses with profits from the other side. Hows the downside ? Brokerage fees. Now let’s look at example 2 with the same scenario.

1) Oil continue to rise. (Add positions to SCO)

UCO = $9.90
SCO = $15.00

Oil then moves up 3%

UCO = $9.90 + 6% = $10.50
SCO = $15.00 – 6% = $14.10

Long SCO
100 x $14.10 = $1410

Portfolio:
$10.50 – $9 x 100 = $150 Profit from UCO
$14.10 – ($15.00 + 14.10)/2 x 200 = $90 Loss from SCO

As you can see, the current standing is with profits from 100 UCO, you can safely long SCO because the prices of oil might have reach top. Let the Oil run for a few more percentage points, and demand will drop, thereby causing prices to drop.

Now onto Scenario 2:

2) Oil drops abruptly 4%. ( Do nothing)
Oil then drops another 7%, due to some rare events. (Long 100 UCO)

Let’s calculate the UCO SCO prices and portfolios:

UCO = $10.50 – 8% = $9.66
SCO = $14.10 + 8% = $15.22

Portfolio:
$9.66 – $9 x 100 = $66 Profit from UCO
$15.22 – $14.55 x 200 = $134 Profit from SCO

Now we see a total of 200, exactly before trading and brokerage fees. We need to consider 5 trade fees, 3 buy and 2 sell trades to clear off all positions.

Now you may wonder what if I am very smart and able to time the market to just buy and sell a single security UCO Long Oil. The difference is with just buy/sell, you generate more trades, while increase you risk as your VAR is @ 100%. Any drop in price means you lose the value.

If I sold UCO with a $150 profit, and oil prices continue to rise, then I’ll miss the boat. If it drops count me lucky. But, If I bought SCO instead, and oil prices continue to rise, then I am hedged, lowering my risk while lowering returns, though.

Let’s calculate the UCO SCO prices and portfolios:

Oil then drops another 7%, due to some rare events. (Long 100 UCO)

UCO = $9.66 – 14% = $8.30
SCO = $15.22 + 14% = $17.3

Portfolio:
$8.3 – $9 x 100 = $70 Loss from UCO
$17.3 – $14.55 x 200 = $550 Profit from SCO

Long UCO
100 x $8.3 = $830

Portfolio:
$8.3 – ($8.3 + $9)/2 x 200 = $70
$8.3 – $8.65 x 200 = $70 Loss from UCO
$17.3 – $14.55 x 200 = $550 Profit from SCO

Your positions won’t be affected by this long because it will depend how the prices move next. What you see now is a hedged positions with 200 shares long each, with a difference of $480, before trades.

Total trades = 4 buy, 2 sell.

Now taking that away will be $480 – 6 trades x $15 = $390. the $15 is my brokerage trade fees.

Another thing is with 200 shares on both long and short, you are neutrally having 0% at risk, though this is not risk free. The market risks causing oil prices to move will be “neutralize” hopefully, because of the dollar cost averaging as well as hedging involved.

Disclaimer: This is a simple yet a difficult strategy for hedging and neutralizing any market risks. To understand this, you would be required be both an active trader, a sound fundamentalist/economist, and the ability to recognize what are good prices to enter the ETFs trade and such. That, would be harder to blog and would not be covered here.

ps: I am *sometimes* using this strategy myself, so this is very revealing. Though market conditions may change, this is subjected to experience and risk per investor.

How to use ETF UCO and SCO to trade commodities – Light Crude Prices

admin — Sun, 18 Jul 2010 14:50:56 +0000

This is an example on how you will use ETFs to trade in commodities, without the use of futures and physical oil contracts.

The following Stock is a product of ProShares Trust ProShares Ultra/Short DJ-UBS Crude Oil, a little description from Google’s finance site:

Let’s give 3 scenarios:
1) Perfect and Wonderful scenario. No Hedge involved. You think Oil prices reached its low.

- Entered Long UCO.
- Oil prices increases
- UCO gains
- Sell UCO, locked in Profits
- Oil drops to low again
- Long UCO
- Oil prices increases
- Sell UCO, lock in Profits

Clearly this is the perfect scenario we looking for. As an not so experience trader, we know such things won’t happen. It may happen 2,3,4,5 times. But it ain’t gonna happen forever.

2) Perfect and Wonderful scenario. No Hedge involved. You think Oil prices reached its high.

- Entered Long SCO.
- Oil prices drops
- SCO gains
- Sell SCO, locked in Profits
- Oil increases to high again
- Long SCO
- Oil prices drops
- Sell SCO, lock in Profits

2nd perfect scenario. Being a shorting expert, you know when the demand and supply is, and probably base on reported crude supplies reserves and event driven news, your short works.

3) With Dollar Averaging (Either long or short)

- Entered Long UCO.
- Oil prices increases
- UCO gains
You decided to hold the gains
- Oil drops to low again, UCO stock rice breaks even
- Oil drops further.
- Instead of cutting loss, load the boat, Long more positions of UCO !
- Oil tests for new low for low prices.
- Hold, do nothing (Keeping in mind price movements.)
- Oil prices increases and moves further either by fundamentals or economy
- UCO gains, sell, lock in profits

This is another perfect scenario if you are bullish on Oil prices, but cannot determine the low of Oil, so instead going in at once, you go in in multiple times. Keep in mind Commodities are need for each and every business, and it definitely cannot drop too low too fast, unlike equities for companies.

After mastering this, I’ll blog in my next posts, how to hedge against market risks with the use of the 2 ETFs, as well as using statistical arbitrage to profit risk free.

Expected breakout for Citigroup’s share price

admin — Tue, 13 Jul 2010 05:27:45 +0000

As of July 12, Citigroup’s share price has almost broken out of its trading range of $3.70 and $4.10, gearing up for a breakout of share price. This has 2 implications.

1) The volume of block selling of Fed’s Citigroup shares were lesser than buying volume, resulting the share price to inch higher. There weren’t any unusual increase of volume traded suggesting that there aren’t much market movements. Thus it may not be a good sign, since the brokers may resume or increase the liquidation volume once again.

2) Based on EMH Efficient Market Hypothesis, the price we see today had priced in market risk, involving entire market’s movement, the release of Q3 company P&L results, as well as the possible good news in the Finance sector. This will definitely push prices up higher as demand increase for Citigroup.

So what are the signs we can expect to see ? Based on these 2 analysis, I am predicting the general 2-6 weeks price movements.

1) If the volume increases, even before or after the release of earning seasons, there might be a chance of Citigroup share price hitting 5-10% higher than what it is at $4 range. That will be about $4.20 to $4.40, keeping in mind the ongoing block sale.

2) Given the good market and strong Profits for Citigroup, we may see a surge of share price, followed by some cool down period, once again reaching the range of $4.20 and $4.40

Thus it may be a good time to already own some small positions, though I am not suggesting you to bet on it at such a mid-high price, depending on your risk level.

Disclaimer: The author have positions in Citigroup (Public, NYSE:C).

My Current “Growth” Portfolio Allocation

admin — Sat, 12 Jun 2010 05:57:38 +0000

The markets are being volatile this month and previous month, where the CBOE VIX Volatility Index went way above its usual mark to over 30 points.

That was when portfolios should be having some kind of balance, hedging with some strategies so we can minimize the great pluinge on Long positions. In fact if you manage to pull it off well, protecting the Long side equities positions with some Shorts, minimizing to a lost of 0% or greater, that would make your fund very attractive.

With the CBOE VIX index down to below 30, we see a shift in portfolios. Currently this is my current portfolio:

35% Long-Term Equity (6mth – 1yr)
10% Short-Term Equity (1-3mth)
55% High Yield/growth stocks

In fact I should retain a 10% cash in my portfolio, but instead I went all in to be invested 100%. The 55% of dividend Long positions should cover me some of the loses taken during May where I liquidated some of my positions.

If by mid June the market volatility drops, I am looking at lowering the Yields and Short term term while putting more at the Long terms. Staying at cash is a good idea, for the markets can once again go into volatile and mixed mindset again. That’s when Shorts and Hedging strategies will take place again.

Hedging strategies with my personal funds

admin — Sun, 30 May 2010 15:36:23 +0000

I now run my personal fund, hoping to grow it. Last time I started trading without any directions. I was just like any other noobish trader looking at technical indicators, cutting loss at X%, stupid swing trading, gluing my eye to the tickers, demand and supply volume… those were a thing of the past.

What I have employed now are something very logical and something I had thought of when I started trading. And all thanks to my old brokerage which has very very limited tools, trading back then was like a Buffet’s buy-and-hold strategy only. With my new broker and some great tools, I started applying these strategies, similar to Hedge funds:

Long/Short equities

Sector funds (Banking and IT related)

Fundamental Growth (P&L)

Short Bias

Equity market neutral (ETFs)

High dividends yielding stocks

Funds of funds

Event driven news (US financial data)

What could I say anymore ? Do take a look on Google if you want to find out more. But here’s the truth of how I manage. These strategies can be deployed by any retail investor like me and you. Use it well and master it, and I believe a 10-20% gains in a year should be very possible.

These strategies had been proven by the big boys, and so it should be. Besides you don’t need high tech/speed machines or algos because there aren’t high frequency stat arb or quanting involved.

The Quants and the Quant trader

admin — Fri, 28 May 2010 14:28:34 +0000

I’ve recently gotten very interested in ways to stat arb, but without the use of high tech computers. Since as a normal investor, or even a trader, we don’t have access to highly sophisicated software, let alone machines.

If I had a brokerage that allows me to program my own logic, calculate prices, compare against other prices then execute buy and sell, that would have been great. But I doubt we have any brokerages like this, and especially able to link our orders directly to the exchanges, and a buggy program will go haywire sending buy orders wrongly.

When talking about quantitative analysis on finance, its amazing that they could use Maths to figure out mis-priced securities. I would had study hard on my Maths if I knew it could be applied.

Could there be a arb strategy with a higher time horizon, where the mispricing could exist in 1-3 months time >? Im in fact exploring it, but until then let this research work be untold.

So what do we have here, traders on fundamentals, technical, trend following, swing, and finally… quant. A special breed of maths, science, and engineering on Wall Street?

Creating a High frequency statistical arbitrage trading house

admin — Fri, 28 May 2010 14:05:39 +0000

Well let’s just say I figure out this myself, after going through tons of head hunters, recruitment and job portals about jobs they are hiring, and second guessing how they make up for the department. In order to build a department of High frequency statistical arbitrage trading, we would probably need these people with these skill sets:

Quants:
2-3 Quantitative Analysts, with skill sets involving options pricing, markets futures calculation, and forex triangle arb and probably a commodity stat arb. They will need to work on using the right formulas with the right markets, and the expected output.

Software Engineers:
3-4 Java and C++. Java provides the web front ends while the C++ algo does the high frequency stuff because the language allows fast execution. Probably some very intelligent developers who wrote algos more than payrolls or database info systems. These guys need to work very closely with the quants, as well as the traders.

Traders:
Depends.. Traders who know the markets well, and know a specific market or securities well, with proven strategies. People with real trading experience provides the team, the algo, the markets sentiments, and analysis, and other events that may drive prices.

IT – Infrastructure:
This team includes networking and communications gurus from the IT industry. With good experience on linking up almost any devices, they also need to know how to allow high bandwidth, networking devices which allows high throughput of speed, ensure uptime.

Fund / Portolio / Risk management:
This is your typical guy(s) who does the most important job of managing the money. Without good management, no matter how good a strategy is, risks are still involve.

So this shall be what I think about creating one such fund. Call it a hedge fund with a stat arb strategy. Any banks or startups could build it, provided with the right tools and people.