Three hours ago, a new bestseller by a certain A. Movchan was released, which the, as I understand it enjoys authority in certain circles, that everyone is discussing him. Cold, we will accept the rules of the game and consider him an authority.:)
The authority announces the profitability of its trade:
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I miss the stars, on the sly, average 8% in dollars for 15 years
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After reading the new bestseller, I understand that in his trading preferences he does not like at least some kind of risk and therefore, mostly, his tools are all kinds of structural products, arbitration and other murky low-income nonsense. The main thing is to have less volatility. Hence, it is clear that the benchmark for him is the risk-free rate. I.e, if overtook her then genius. And all that is more 8% it's just space and this can't be.
But at the same time, in his new bestseller, this is what slips:
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Certainly, many will argue, that there are successful algo traders from small houses and generally successful managers with high incomes (that is, those, who SUSTAINABLY shows more 7-8% per annum ).
this is true for all trend followers – conscious and not. A simple short RTS would give with 2010 almost a year 30% per annum stable until the start 2016 of the year.
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So here, nevertheless, he agrees that on trendfollowing you can constantly earn more 7-8% per annum. What's the problem, let him trade trend following if it is much more profitable. But no., for some reason such a prospect does not attract him. Well this is understandable — in trend following it is necessary to take risks, but I would like it without risk. Well, no risk and we get a risk-free rate. I want to, but pricks. The circle is closed :)
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New bestseller from A. Movchan about the dangers of algorithmic trading
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One of the laws of social communication says: no matter how you explain, someone still won't understand.
I seem to have explained in great detail about the market and algorithmic trading., but not everyone understood me – means poorly explained. Arrivals and screams «God is alive» I will not comment, it makes no sense. Reasonable questions and comments boil down to the following:
(1) Are the markets random?
(2) How do you know that?
(3) That there are no successful managers at all? But what about my friend Petka?
(4) Then what to do?
I will try to comment.
Major misunderstandings are expressed in words: «Here you say, that the market is completely random, but then nothing matters at all – our size, nor equipment, no team»
Nothing is random at the non-quantum level.. When you flip a coin, in the moment, when she came off your hand, already reliably determined, which side will it fall. The trouble is, that you do not know this and cannot know. Who will be born to a woman, who just found out, that got pregnant – boy or girl? Until the ultrasound – this is a random process. After – the answer is known for sure. We call the process random, the result of which WE ex ante CANNOT KNOW. In this sense, there are no random processes at all. – they are all random FOR SOMEONE (sometimes – for all), And, Besides, the expectation of the result is different for everyone. For a couple of young people in a rented office in Moscow City, sitting at the computer, the US stock market is completely random, probability of success 50%. For the program, which has the fastest access to the exchange and is configured to catch the price discrepancy between the index and its basket, the appearance of such a discrepancy makes the situation much less random – the program knows, that the discrepancy will almost certainly close in milliseconds. For an investor from Moscow, who is busy with the construction of office centers, and on the advice of a friend buys a bond from a small company in rural Indonesia, the process of its repayment is just as completely random, how random will the first person's hair color be, whom you will meet, out on the street. For an experienced investor, studying the creditworthiness of companies for many years, researched the statements of this company, spoke with analysts on the spot, with creditors, with the director, with owner, with suppliers, with clients, with competitors – the issue of redemption has become much less random. In both cases, he remained random, but the likelihood of a favorable outcome has increased greatly. For an ordinary manager, the question is – вырастет завтра stock or not – is random. For a member of the board of directors, just approved the merger – almost certain.
WITHIN RANDOM PROCESSES, ON THE MARKET, THE ONE WINS, Who knows how to shift the expectation of the results of their actions in a positive direction. How? Having more information, than most players, or having it faster than most players, or having more options, than most players.
Hence the moral for the investor: give money to those, who will prove to you, that they have one of three advantages, preferably two or three:
(1) More information (an experience + the ability to do analysis and, not less important, its careful execution + information channels + work in a niche market, where a big man's foot does not go);
(2) The speed of obtaining information and the speed of reaction (expensive systems mainly; insider, as unauthorized receipt of information ahead of others, prohibited by law);
(3) Unique opportunities (for example – trade in a highly closed market, structure very complex derivatives, influence markets, etc.)
The sadness is, that in real nature you will most likely find only advantage # 1, but it does not give very large income, 5-10% per annum in dollars today its limit (it would be more correct to say – 3-7% above inflation). But – it is stable. Advantage # 2 used by mega players, they don't need your money. Advantage # 3 – the lot of usually the largest brokers and banks, your money is unnecessary for them too.
You can of course say: «but is it a unique algorithm – this is not a way to increase the amount of information?» Of course the way. There can be no unique algorithms – they are the perfect commodity, math is one for all. The algorithm can only be used, taking it from a thick book on systems theory. And the times have already passed, when algo was new and algorithms first entered the market, realizing their advantages. Today you can say without fear, that all methods, known to science and do not require systems that do not yet exist, applied in large markets and even, perhaps, on small ones too – and the markets have changed for these methods. In low-income (until the same 5-10% per annum) areas have niches, where powerful players don't go – it is not adequate for them to build cars for such income. In these niches, you can beat the audience with your hands., which goes ahead (index funds, pension funds, sectoral funds, institutional, private banks – they all go ahead, for them extra. analysis – unnecessary pleasure, they already feel good; corporate hedging risks are also going ahead, they don't need income at all, they would not lose). But in the algo area, as in the double-digit yield zone, competition is fierce. Few large peasants, which is the fastest and absorbs all inefficiencies; few robots scouts and robots saboteurs, that identify other people's strategies or make other robots err in their favor; there are still large collectors on the market – they are looking for lucky newbies, hiring them while their algorithms are still generating profits and throwing them away, as soon as profits start to fall.
Certainly, the world does not stand still. An essential part of the mathematical apparatus cannot yet be realized – lack of computer power. In the same pattern recognition, the possibilities are endless., and of course, with the growth of power and speed, new players with new opportunities will appear. But this is not hope for newbies, a risk for the shark market; it's iron competition, it is the lot of the largest and most capable of hiring the most talented. On our Tatooine, in the back of the galaxy, you can not even dream of this.
And don't suspect me of ignorance of trading, colleagues. I know him from all sides – and traded, and led indirectly, and was a client (and fought a lot with traders). And I – mathematician by education, statistics and theory of optimal processes (managed systems) – my speciality. I somehow understand the mechanisms of simple multiparameter optimization, even if it is done on fuzzy sets and with training, and in pattern recognition. And I have been managing money myself for a very long time. And yet biased – I don't like promotions (I think, that the stock market has been practically casinos lately), I deal mainly with bonds, Derivatives, macro, I love the old proven methods.
I miss the stars, on the sly, average 8% in dollars for 15 years, volatility is lower 7%, behind 15 year income 7,6%, behind 16 year about 7% (recent 3 quarter – 4,3%, the first quarter was good), in 17 year will be clearly less 7%, (but on the other hand, it is stable and always with its own money together with client). I always say the same to everyone who wants to: want to «asset management» – this is not for me, there are many heroes. To me only instead of a deposit. Well, or when you play enough with «profitable products». I try to maximize Advantage # 1 (an experience, knowledge, analysis of issuers, allergy, rhymes, direct contact with everyone, with whoever you can, a network of friends around the world, work in niche markets), I don’t think about Advantage # 2 at all and try to add Advantage # 3 a little bit by working with the best brokers – I well understand the limits of my capabilities. Am I making mistakes? Certainly. In the briefcase – seldom, out of portfolio – often. Я вроде бы макро specialist. I'm in 13 year predicted a fall in oil and ruble, I correctly predicted the rebound of American markets after the crisis, fall in the price of gold, recovery of the Russian market in 14m. But I didn't trade on this. Why? Because I'm in 16 year was sure, what a pound by 1,31 this is overkill and it will go back. And he now – 1,2. Could I, based on the past years, give at the beginning 16 money for macro strategy? And how. What would you have? Think – minus 20 – 25% per pound exactly. So I don’t give myself money for a macro strategy and I don’t advise you – I have no advantages in it. And in the bond – eat.
But what's even more important, which is confusing and makes you believe: players, not having the advantages listed above, MAY show high income too. This is due to one of two factors.:
(1) Randomness. There are five boys in the family, the manager accidentally has chains of successful operations. Probability 5 years randomly guess the market – 1/32. Sixth – ½.
(2) Correlation портфеля с длинным восходящим трендом рыночного актива или их комбинации. This correlation is not always easy to see.. For example, would show excellent results in 2013 – 2016 years fund, correlated with a combination of long DJ and short oil, even in 2016 year with a certain combination would show even growth. But just lay it on oil or S&P would fail. This is an especially dangerous thing. – not all managers can reflect on the fact of such a correlation and honestly believe, what did the perpetual motion machine come up with, whereas in reality their algorithm is simply «long (short) biased» to some combination of assets. I've reviewed hundreds of products in my career, of which hundreds «successful strategies». Approximately at 80% such bias is caught. It means that the manager does not understand, how did you earn, and as soon as the trend changes, it will magically start losses.
Smart people write fairly: but what about the well-known patterns, identified by Fama for example, Sort of «big companies versus small companies» or «regression to mean»? Yes, there are such patterns. Is it possible to trade on them? Not, it is forbidden. Why? That's why:
(1) These patterns have no time limits and no normal distribution of deviations.. Yes, deviation from the long-term trend can be found. But is it big – can't say; maybe it will increase many times before going «back», and «back» will go through 10 years. These types of patterns are used in strategy management. «global macro». It is this strategy – the most unprofitable. That's why.
(2) These patterns don't always converge: at long distance the influence of random factors – swans can be decisive. Swans can be idiosyncratic (a fool CEO came and the company collapsed, a new invention killed the product, etc.) and systematic (financial crisis, the revolution, new taxation, etc.). The longer the rate, the more likely it is to fall under such a factor.
(3) Since, how these patterns became known, and their authors received awards, all large houses began to try to use them. Because of this, the patterns themselves have changed significantly.. To understand, How does this happen, try to remember the street, where traffic jams are formed during rush hour. Imagine, that you discover a detour through the yards. You ride it happily for days. Then you find that other astute motorists are driving along the bypass. A month later, there is almost the same traffic jam on the bypass road (only nonresidents and newcomers do not know about it), and sometimes there is a big cork on it, because for some reason there was no traffic jam on the main road (traffic light broke), but still we went by the yards.
(4) Multiple studies show, that the marginality of these factors is so low, which does not cover broker commissions and the cost of short positions. There are studies, saying no, still covers, but gives a low sharpe, and what are they for with a low Sharp?
And further, yet, once again: Certainly, many will argue, that there are successful algo traders from small houses and generally successful managers with high incomes (that is, those, who SUSTAINABLY shows more 7-8% per annum WITH LITTLE VOLATITY).
Firstly, this is true. The Richard Dietz Foundation shows almost 14% annually for about 10 years, and not only because it fell into the era of rate cuts and hyper-liquidity, but also because his team – bison in distressed debt, ready to rip out the remaining bonds from borrowers; they – the best on the market, they run 1,5 billion and can afford a powerful team and influential connections around the world. But this – 14% And 10 years, and they do distributions, this is not compound interest. There are few such teams in the world, they don't really need your money. Or, for example, players, saddled quite a niche market – only developing, tiny, with tax inefficiencies – they can make double-digit profits in a short period of formation of this market on very small volumes (By the way, the Russian market is still such a niche, make arbitration easier on it, than in the USA, smart guys with good equipment earn during periods of volatility at a percentage per month, true when everything is calm – may lose).
Secondly, this is true for all trend followers – conscious and not. A simple short RTS would give with 2010 almost a year 30% per annum stable until the start 2016 of the year.
Thirdly, you have seen a lot of track records for over 3 years? And I have not seen – so, dozen. And on the horizon of 3 years, every eighth chaotically trading should look like a great trader. Was it 3 years ago 80 teams on the market? Of course it was.
Fourth, there are many professional garbage sales on the market, who will sell you your mother inexpensively for a commission. Take a look at the capitalogy.io website – these are the same people, what seems to be the deceased laboratory of investment technologies. Hear what they say on Echo of Moscow. At least these fools can only believe them, people who do not understand anything at all., but there are plenty of smart sales.
Fifth, if I wrote now, that divine fire does not descend into Jerusalem, or that Jesus did not heal a blind man, or that King Solomon did not exist, or that Muhammad did not ascend from the temple mount, or that homeopathy alone does not work for health – you know how many commentators would come running with statements to the contrary and even with articles «Denial of divine fire – ignorance or incompetence?» Vera – great woman and unrivaled in intimacy, but completely blind. We tend to believe that, what we were taught in childhood, at that, what we do ourselves, at that, which protects us from fears. Why are ingenious trading algorithms worse than holy relics in the sense of faith?? nothing. But science requires testability. And then comes «At sixth»: don't argue with me, gentlemen believers, just bring results – show me money. Convince me – and I am ready to give a lot of money for management, and pay any commissions. I will also market you.
So here, At sixth. We are in an Orthodox country and therefore simply have to believe in a miracle. But even the Vatican checks miracles. Therefore, if you nevertheless come across the managers, which show, as if, attractive results, before, how to give them money, I advice:
(1) Test yourself on your knowledge of mathematics. Calculate your annual income by 1 dollars, at yields from 10% to 50% and the period in years from 3 to 35 years for example. Very good brings to life.
(2) Check their identity: who are they anyway? Someone knows them? Where are the families, children, who worked with them, studied? What are their previous achievements – in science, in business, in finance? If it is not clear – out of bounds; if they are nobody yet – out of bounds, let them come when they do something in life. If there is no one older on the team 35 years – out of bounds. Young geniuses are found everywhere except the latest news.
(3) Check them out for insolence: if bragging, promise a lot, speak quickly and persistently, very touchy, shout that they are benefactors and you are about to miss the chance – these are scammers, out of bounds;
(4) Check for confidence: if they promise profitability (any other than a minus 1% per annum) – at once (!!) out of bounds: they are not only scammers, they don't know the rules of conduct for decent financiers; if they talk about income and don't talk about risks – also out; if they use concepts «average income over several years», and annual incomes vary greatly – also out, they do not understand the limits of the applicability of statistics; if they show a track record for several months or even years, and they say that he proves something – out for the same reason;
(5) Check for benefits: don't give them money, if they can't explain in detail, which of the three benefits do they exploit. Notice, «unique algorithm» not included in the list of such benefits, algorithm – this is a spoon, advantages – soup. No soup, no spoon needed;
(6) Check for prerequisites: What is their education – can they even understand, what are they talking about? How much money do they have – if less, than you, then why? How much of their own money is in the strategy? If less than a few million dollars per person – immediately out, they have not earned anything and / or do not believe in their own strategy;
(7) Check for honesty: how openly they tell, what they do? How to honestly talk about problems? hide, how much do they manage – immediately out; not ready to show the essence of the strategy – immediately out; not invited to the office – immediately out; cannot represent all the managers – out and so on. Talk to the girl in detail, which prepares documents – you can learn a lot of interesting things, since she is usually not instructed to lie and will say that, what knows;
(8) Finally check the strategy: find a specialist in investments, in mathematics, let him talk to them about whether they are carrying a blizzard. If carry – out of bounds;
(9) Check structure: where do you give money? «to them on account» – immediately out; it is not clear what is not clear where – immediately out; or let them manage your account with your broker, or let them substitute the licensed fund, managed by a licensed administrator, better if there is a track record audited by the big four, should definitely be ISIN, should be reflected in Bloomberg. Unless it is a product of people with an impeccable long-term reputation (e.g. Lanister, they always pay), then do not be lazy to talk to the administrator – it must be a global player, and check with the Securities Commission of the country of domicile of the fund, that it really exists and is regulated. The same goes for the broker. By the way, good structures are forced to do good compliance. If you are not asked to verify your sources of income, place of residence, biography from birth, great-grandmother's nationality (all with apostille) – out of bounds;
(10) Check without money: if it's HFT, immediately out, they, who can hft do, won't come to you for money. If not – ask to send you transactions upon completion. At least a quarter. Will refuse – immediately out.
(11) Check yourself for attractiveness: players, who are not going to undress you, God forbid they will earn money for you 1-1,5% per year in commissions, and from this cover all the costs of your work (Oh well, okay, let them take 2/20 and from your pontus income in 15% will even have 4,6%). What do you think, 1000 dollars a year from you (while, what do you need reporting, and answer your questions, and feed lunches, and I / O will be, and sales wants a salary, etc.) they will be satisfied, if they really know how to work? Here's something. If they are willing to take less 100 000 dollars per client (Oh well, less 30 000 dollars if 2/20) – out of bounds, they do not plan to work honestly. Do not confuse with «kitchens» Sort of «Alpari» – they provide casino services, with them, the client leaves all his money on average for 3 months, so they and 100 dollars will be taken, but at least they speak honestly, what they do.
Yes, of course, a lot of people came to me with words «as it is possible so indiscriminately one size fits all. What if it's still a genius?»
На это у меня есть quote из Пелевина (I bring her for any reason, she is universal):
«Elementary, Watson: if a girl sucks x * d in a brothel, from this it follows with a high degree of probability, what is a prostitute in front of us.
I felt resentment for my generation.
— Why is it necessary to be a prostitute, — I said. — Or maybe it's a seamstress. Who just arrived from the village yesterday. And fell in love with a plumber, repairing souls in a brothel. And the plumber took her to work with him., because she temporarily has nowhere to live. And there they had a free minute.
Samartsev raised his finger:
— It is on this unspoken assumption that the entire fragile mechanism of our young democracy rests…»
I.e, for optimists: If a team of twenty-five year olds with no money of their own offers you a unique money management strategy, according to their assurances bringing 25% annual in foreign currency, and wants you to give them money (can be from 1000 Dollars) in cash or by transfer to a company account in the Seychelles, because their unique algorithm only works on these islands, then from this it follows with a high degree of probability, that we are faced with fools or scammers.
But not necessarily. Maybe these are young scientific geniuses who happened to meet in Moscow., (who are born one in a hundred million) but their soul is so wide, that they give all their earned billions to orphanages, and want to make all investors happy, even little ones, high income. In addition, a difficult childhood developed paranoia in them and therefore they involuntarily hide all data about their strategy and do not even license the fund.. It is on this unspoken assumption that the entire fragile mechanism of attracting money from Russian investors under promises rests 25% per annum.
