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odyd

Trading Strategy

130 posts in this topic

21 minutes ago, explo said:

The much lower risk is in terms of max drawdown which is relevant to the risk of leverage. The normal risk concept of volatility (which is relevant to IRR impacting investment timing risk) is also lower than stocks, but not that much for some individual funds. Both types of risk are significantly lower in the basket than individually due to low correlation between the funds while different stocks usually have high correlation (to market and thus eachother) through their positive beta, especially in down periods, making it hard to reduce max drawdown in a stocks basket a lot through diversification.

The youngest fund is 12 years old and the oldest one 18 years. They all achieved the above 10% average return since inception and experienced very low drawdown during 2001 and 2008 market crashes. Their max drawdowns are between 10-15% (stock index max drawdown is above 50%) and the basket would have had less than half of that. Thus the leverage holds in historic simulation. Future not repeating history might break the strategy though. I think the risk that the future return will be much lower than historic is much bigger than that future risk will be much larger than historic, but it only takes one new record negative event to blow up the portfolio and more. Only one very low risk fund expose more than 100% of the portfolio capital. 

 

Really they only had max drawdowns of 10-15% during the 2008 crash? Call me skeptical as expect for real estate in Palo Alto and Monaco, I can think of few assets, much less an entire asset classes, that only showed a 10-15% drawdown during the crash. Are they heavy government debt as that asset has had a massive boom over the past 10 years with yields falling from over 5% in 2006 to 1.7% now. Not sure how much further this trend can continue.

Either way, a 15% drawdown at 3.5:1 leverage is an over 50% loss of invested capital which really equivalent to a monthly swing in holding solar shares so I guess we're all accustomed to that level of volatility. 

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24 minutes ago, BIPV Investor said:

Really they only had max drawdowns of 10-15% during the 2008 crash? Call me skeptical as expect for real estate in Palo Alto and Monaco, I can think of few assets, much less an entire asset classes, that only showed a 10-15% drawdown during the crash. Are they heavy government debt as that asset has had a massive boom over the past 10 years with yields falling from over 5% in 2006 to 1.7% now. Not sure how much further this trend can continue.

Either way, a 15% drawdown at 3.5:1 leverage is an over 50% loss of invested capital which really equivalent to a monthly swing in holding solar shares so I guess we're all accustomed to that level of volatility. 

15% MDD is for individual funds. The basket (2008 included but not 2001) is around 7%.

The strategies are different and these are the cherries picked from vetting hundreds of funds (already vetted by broker). Almost all hedge funds are crap.

 

Edited by explo
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My numbers look rather weak. My accounts are without leverage and are fully funded. One-year is around 34% down. My 3-year is 57%, and 5-year is about 14%. Despite using a discount broker, my trading cost is 11K in commissions in five years.

The bottom line is I am only riding my 2013 results, and I am riding them down. Solar has been bad for me for last two years and this year.

I need a double somewhere. I thought that was going to be TERP, but it became the biggest hit of this year. My choices will be JKS, CSIQ, FLSR and for now PEGI.  I may go out outside of the barn and look for value, but I got, to be honest, it is not comfortable after focusing only on solar for such a long time.

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12 hours ago, odyd said:

My numbers look rather weak. My accounts are without leverage and are fully funded. One-year is around 34% down. My 3-year is 57%, and 5-year is about 14%.

 

I've been more lucky to have my more than 200% gain in 2013 preserved with only a 5% loss in 2014 and then extended with 35% in 2015, but this was with old concentration strategy and luck.

Attached below is the development of JASO and the USD gain on the Euro during 2014 and 2015. Those two were my dominating exposures and JASO helped keeping me flat while the USD helped lifting me 30% for a total effect of +30% for the two years.

JASO+USD.PNG

12 hours ago, odyd said:

Despite using a discount broker, my trading cost is 11K in commissions in five years.

My current trading fees annual cost run-rate is around 0.6% of portfolio capital and then there's around equally big forex fees cost of 0.7% annually (since all my trades are in foreign currency and my account only allows local currency thus each stock trade cause an implicit currency trade too). Each of these are less than half of my current tax cost run-rate of 1.6% annually, which in turn is less than a third of my current interest cost run-rate of 5.8% annually. Tax and interest cost I account for separately, while trading fees, forex fees and forex losses/gains are included as part of the return on the security they occurred for.

12 hours ago, odyd said:

I need a double somewhere.

This is how my old strategy (not much of a strategy rather an investment style) worked. I needed a big 2013 to recover a bad 2011 and 2012 and it was possible by high exposure to high beta stocks.

Now after exiting that old strategy at the opportunity of lucky forex gain in 2015 a 2013 repeat is no longer possible. In the chart attached below I've applied my current allocation strategy to historic data to see the monthly sampled annual (AR) and quarterly (QR) return distribution for the last 10 years.

return_distribution.PNG

As can be seen up to 100% annual return happened in rare case, but there's nothing beyond that. What's more interesting to me is the average around 30% and the minimum of -15%. The quarterly distribution is more narrow, but also can be more negative. This is because good hedge funds usually have short memory and quickly recover negative return.

I realize that this distribution looks to good to be true, but it is an after the fact pick and the future distribution will likely not be as good, but tuning based on best track record and only achieving something close to that would be good. I view it as there is a buffer for worse performance. If the bar is set at 30% average returns over time at low risk, maybe 20% average returns can be realized or at least poor returns or losses over time can be avoided.

For the first quarter on record for the new portfolio strategy it returned roughly -5.5% after deducting -1.1% in startup cost for fund purchase fees. So that's in the left range of expected quarterly returns. If I stay there for the other 3 quarters of the year the expectation of historic return distributions to roughly repeat will be concluded flawed.

 

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I just find it is hard to make money in the current environment. It was easy to understand the 2013 numbers. The industry recovery was a lot more visible but did not reflect that in stock prices. Both years had beautiful bottoms and relatively high tops, but I did not do a good job on riding them. I also had disaster meeting with options one of those years wiping out almost everything in one account.

In the time of confusion, it is nice to rely on some income stocks and TERP was the ticket here, and SUNE ruined it for me. I am in PEGI now to see if this can be that place. I do want income, but nothing crazy, and the potential for equity growth is there as well, as they become a larger business, this year.

What I need to do is to stop trading. I trade way to many times. I need to be more disciplined and wait for an entry point and also ride for longer when I do. I should know what fluctuation is by now.

 

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1 hour ago, lepv123 said:

Is TERP too dangerous to come in now?

The situation with TERP did not improve from my sale on March 16th. The price is about the same, while Tepper bought more. TERP is being sued for the First Wind. SUNE has not reported. The dividend is an unknown, bankruptcy impacts are unknown. Yes, I think it is dangerous to buy back, as it may go down before it goes up. There will be moves up, but it is hard predict anything about this stock right now. This is is why the risk is more than award.

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I hope this is just a temporary situation. The fact that Tepper bought more bodes well for TERP's future. I can't imagine TERP sinking to the $6s, but if so, that would be a great time to go in for sure.

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I find nothing assuring about $6 per share. Would you consider if dividend was cancelled to pay $6 as a value?

If I know bankruptcy process and how affects yieldcos here in the US, I would consider it. Tepper's buying at this point does not make a lot of difference. Einhorn was buying SUNE and what happened to him?

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3 hours ago, odyd said:

What I need to do is to stop trading. I trade way to many times. I need to be more disciplined and wait for an entry point and also ride for longer when I do. I should know what fluctuation is by now.

 

To trade or not to trade that is the question. I find these stocks hard to predict and moving a lot without a clear direction. I think "smart" trading them hard, meaning it is hard to trade them based near term future direction guess ("it seems to be appreciated by the market now, that will likely continue") as the market just tend to jerk them around a lot. This makes dumb trading easier and profitable ("it's low again, time to buy, it's high again time to sell"). A strict scheme to eliminate psycology ("it's high now, maybe it's better than we thought, i'll hold it longer" and vice versa) works best for me as long as these names move without clear direction.

Edited by explo
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