Systematic equity funds? CTA's that trade stocks?

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ecritt
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Systematic equity funds? CTA's that trade stocks?

Post by ecritt » Mon Oct 23, 2006 3:17 pm

Does anybody on this forum have knowledge of any truly systematic equity mutual funds and/or hedge funds? By systematic I mean purely price/statistics based, not quantitative evaluation of fundamental metrics.

Or.....

CTA's / Global Macro firms that have programs that trade cash equities???

Thank you,

Eric Crittenden
Director of Research
Blackstar Funds, LLC

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Post by ecritt » Sun Oct 29, 2006 8:37 pm

Zero? Not a one?

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Post by sluggo » Sun Oct 29, 2006 9:12 pm

Do these five mutual funds fit your definition: http://www.fundxfund.com/ ?

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Post by ecritt » Sun Oct 29, 2006 9:22 pm

sluggo wrote:Do these five mutual funds fit your definition: http://www.fundxfund.com/ ?
The one that trades stocks (STOCX) does. Thank you.

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Post by Jason » Mon Oct 30, 2006 6:25 pm

Eric,

As I understand it, Campbell & Co. no longer offers capacity in their FME Large Portfolio. Rather, they offer a Multi-Strategy portfolio which is 70% FME and 30% long/short stock strategies.

According to the latest stats I have, the performance from Nov 2003 - April 2006 looks as follows:

FME CAGR +10.00%
Multi CAGR +12.66%
FME Ann SD (M) 12.24%
Multi Ann SD (M) 8.08%
FME Sharpe 0.61
Multi Sharpe 1.25
FME (+) months 60%
Multi (+) months 80%

These figures imply that adding their stock strategies considerably improves their numbers.

It might be interesting to combine a 30% cash investment in the S&P with a 70% allocation to some plain vanilla TF strategies to shed some light on how much of the benefit is derived from the index alone.

Best regards,

Jason

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Post by ecritt » Mon Oct 30, 2006 8:21 pm

I think Campbell's equity trading is both short volatility and very short-term (1 or 2 day hold times). Nothing against Campbell, they are clearly very smart people, but I do not understand why they and every other CTA choose not to offer a long-term cash equities program. The traditional asset space dwarfs the managed futures industry and the competition, on a dollar weighted basis, is very weak.


What am I missing?

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Post by nickmar » Mon Oct 30, 2006 8:42 pm

You would be surprised how important the marketability aspect is in the equity long/short space. I suspect that the due diligence teams at fund-of-funds feel more comfortable allocating to a Long/Short Manager who utililizes a bottom-up approach and is able to "tell a story" about every name in their portfolio as opposed to a purely quantitative long-term approach (statistical arbitrage excluded).

I am surprised that not more CTAs have entered this niche, however. If anything, I think that this presents a wonderful opportunity to the smaller CTA who can still play in the small-cap space. It is certainly on our "to-do" list.

Nickmar

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Post by ecritt » Tue Oct 31, 2006 3:21 pm

nickmar wrote:You would be surprised how important the marketability aspect is in the equity long/short space. I suspect that the due diligence teams at fund-of-funds feel more comfortable allocating to a Long/Short Manager who utililizes a bottom-up approach and is able to "tell a story" about every name in their portfolio as opposed to a purely quantitative long-term approach (statistical arbitrage excluded).

I am surprised that not more CTAs have entered this niche, however. If anything, I think that this presents a wonderful opportunity to the smaller CTA who can still play in the small-cap space. It is certainly on our "to-do" list.

Nickmar
Rennaisance seems to be having no problems raising billions for their systematic equity program (which holds thousands of positions and is long-term). They expect to raise $100 billion. Why no CTA's try to compete with them for this giant pool of money is a mystery to me.

I fully understand your argument about fund of funds and their desire to hear a story about every stock. But, on a dollar weighted basis they are a minority in the traditional space. More than half the money in this space is in passive indexes like the Russell 1000 or Russell 2000 which do not consider fundamentals, stories, new products, free cash flow, etc.

Why do you associate the opportunity with "...the smaller CTA..."? Our work suggests there is well over $1 billion in capacity from day 1. We have over 1,200 stocks that are at new all time highs in our portfolio today.

Take care,

ec

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Post by nickmar » Wed Nov 01, 2006 9:58 am

Eric: you certainly bring up a good point regarding Rentec. They have already surpassed the $10B mark in assets under management (in less than a year) and they were up over 12% YTD through August. Rentec does employ a long-term long-only approach but I suspect that their goal is return enhancement relative to a benchmark. In the traditional institutional investment world, peer outperformance is sadly more important than absolute returns.

A trend-following strategy applied to stocks is likely to have a different return profile than that of a traditional long-only Manager since position sizing is usually not a function of market capitalization (most equity indices are market cap weighted) but probably more dependent on volatility. I suspect that this is the source of the large return differential between the strategy outlined in your white paper and the S&P 500 in the year 2000.

I do find it quite odd that few CTAs focus on stocks. I seem to recall that Jerry Parker's firm, Chesapeake Capital, traded cash equities in the late 90's - not sure if they still do, however.

Regarding my comment on the appropriateness of this strategy for smaller CTAs, I was under the (mistaken) impression that much of the return attribution from such a strategy comes from small cap stocks.

I forgot to mention that I thoroughly enjoyed reading your white paper "Does Trend Following Work on Stocks?" - I found it to be very well-written and researched.

Nickmar

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Post by sluggo » Wed Nov 01, 2006 5:19 pm

Aren't y'all forgetting the thundering herds of "Global Macro" hedge fund managers? They trade anything and everything, including commodities, so they have to register as CTA's too. Series 7, Series 3, blah blah blah. They also trade cash equities, it's a major slug of their business. Snuffle your way through some of their Disclosure documents and see if you don't find a 100% systematic Global Macro manager or two.

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Post by ecritt » Wed Nov 01, 2006 6:23 pm

sluggo wrote:Aren't y'all forgetting the thundering herds of "Global Macro" hedge fund managers? They trade anything and everything, including commodities, so they have to register as CTA's too. Series 7, Series 3, blah blah blah. They also trade cash equities, it's a major slug of their business. Snuffle your way through some of their Disclosure documents and see if you don't find a 100% systematic Global Macro manager or two.
I'd love to know of one that offers a cash equities program that is systematic, long-volatility, and not based on fundamental metrics. In 3 years of looking I've not found any.

There are some in Europe trading cash equities. But, for some reason they are using factor models with fundamental inputs just like everybody else in the world, not their trend following systems. I don't get it.

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Post by budonk » Thu Nov 02, 2006 12:25 pm

one of the main reasons, imo, is that there is the perception that stocks and stock indices "don't trend". . .

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Post by ecritt » Sun Dec 03, 2006 3:48 am

Eric: you certainly bring up a good point regarding Rentec. They have already surpassed the $10B mark in assets under management (in less than a year) and they were up over 12% YTD through August. Rentec does employ a long-term long-only approach but I suspect that their goal is return enhancement relative to a benchmark. In the traditional institutional investment world, peer outperformance is sadly more important than absolute returns.

I don't doubt for a minute their ability to raise the projected $100 billion. Heck, they will probably even eclipse that number by a healthy margin. It's certainly just a drop in the bucket compared to what is available in the market place.

A trend-following strategy applied to stocks is likely to have a different return profile than that of a traditional long-only Manager since position sizing is usually not a function of market capitalization (most equity indices are market cap weighted) but probably more dependent on volatility. I suspect that this is the source of the large return differential between the strategy outlined in your white paper and the S&P 500 in the year 2000.

Seems to me this is what allocaters "say" they are looking for, uncorrelated risk drivers. A volaility weighted index clearly offers such when stacked up against a market-cap weighted index.

I do find it quite odd that few CTAs focus on stocks. I seem to recall that Jerry Parker's firm, Chesapeake Capital, traded cash equities in the late 90's - not sure if they still do, however.

We talked with Chesapeake. They do some single stock futures if I remember correctly, but nothing significant.

Regarding my comment on the appropriateness of this strategy for smaller CTAs, I was under the (mistaken) impression that much of the return attribution from such a strategy comes from small cap stocks.

Certainly small caps play a larger role in a volatility weighted scheme since they outnumber large caps. But this does not translate into insignificant aggregate capacity. We have 1,300 open positions right now, the vast majority of which have an average daily dollar volume well in excess of $1 million. If we mixed in Canada and England the number of open positions would be closer to 1,700. There is also Japan, Belgium, Germany, Switzerland, France, etc.. That's a ton of capacity.

I forgot to mention that I thoroughly enjoyed reading your white paper "Does Trend Following Work on Stocks?" - I found it to be very well-written and researched.

Thank you! I'm considering writing a follow up with out of sample performance results. There has been no deterioration in the descriptive stats or performance. The transaction cost assumptions have been validated as well as the operational feasibility.

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Post by AFJ Garner » Sun Dec 03, 2006 4:52 am

One thing you might also add is a thought or two on start date dependency; which I am sure you have researched.

You might also like to give us your thoughts on portfolio turnover and management.

Particularly if you intend to go global, you have either got to have an extremely small allocation to each individual stock (and an estimation of the maximum possible number of stocks on which you will receive signals) or a method of exiting or reducing old positions to accomodate new signals.

Additionally, I can envisage the possibility that a trend following system which did not rely on all time highs being reached, might pick up more aggressively on a market upturn such we have had these past few years.

At present TB would benefit from a little work before becoming the optimal tool to pursue such testing - as I have pointed out on other threads. The ability to exit stocks in a ranked order and a more satisfactory and wholesale manner of creating an extremely large portfolio for TB, are two prime examples.

I have every confidence that TB will become the optimal tool for such work over the coming months.

These guys could certainly do with looking at trend following on IPOs, given their awful performance:

http://www.ipohome.com/default.asp

I have long traded IPOs to capture the opening premium. I look forward to being able to test a more systematic approach to trading such stocks in the aftermarket.

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Post by danZman » Mon Dec 04, 2006 5:48 am

AFJ Garner wrote:One thing you might also add is a thought or two on start date dependency; which I am sure you have researched.

You might also like to give us your thoughts on portfolio turnover and management.

Particularly if you intend to go global, you have either got to have an extremely small allocation to each individual stock (and an estimation of the maximum possible number of stocks on which you will receive signals) or a method of exiting or reducing old positions to accomodate new signals.

Additionally, I can envisage the possibility that a trend following system which did not rely on all time highs being reached, might pick up more aggressively on a market upturn such we have had these past few years.

At present TB would benefit from a little work before becoming the optimal tool to pursue such testing - as I have pointed out on other threads. The ability to exit stocks in a ranked order and a more satisfactory and wholesale manner of creating an extremely large portfolio for TB, are two prime examples.

I have every confidence that TB will become the optimal tool for such work over the coming months.

These guys could certainly do with looking at trend following on IPOs, given their awful performance:

http://www.ipohome.com/default.asp

I have long traded IPOs to capture the opening premium. I look forward to being able to test a more systematic approach to trading such stocks in the aftermarket.
There are definitely some things I would like to add to TB, but it's pretty amazing as it is. I'm impressed that it can go through the 3000+ stocks in my database and find the short-term edge I'm looking for. I wouldn't mind a super computer for slightly faster testing. Perhaps that's one reason the futures market is so popular with system traders. The other possibility is the leverage factor...unless you use SSF's or can get someone to give you 10-1 margin.

I would like to see an improvement on trade sequence with TB for sorting. I would also like to see the Broker object have some sort of stop limit order entry. It makes no sense to buy at a certain stop if it gaps above your planed exit price.

D

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Post by Tim Arnold » Mon Dec 04, 2006 2:10 pm

We will address the Trading Blox suggestions in the Customer Support forum.

viewtopic.php?p=21061

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Post by AFJ Garner » Tue Dec 12, 2006 12:15 pm

A useful project to attempt would be to test trend following on an MSCI World type portfolio: using stocks not only from the US but from a large selection of world markets both mature and exotic.

What a task. Especially if you are concerned with survivorship bias. And you would have to be a rather large fund if you were to take every signal.

Look at it this way: on futures, many of us include as many different contracts as our account size will stand on the basis that hopefully at least one or two of such contracts will produce the magic 15R + gain each year. Who knows which exotic stock market may produce the next such gain?

It is true that, thanks to globalisation, stock markets have tended to move more and more in tandem. Nonetheless, the cautious investor who requires maximum diversification over geographical economies and currencies would probably prefer to put together an MSCI World type portfolio rather than restricting himself to the US.

Hmm............

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Post by AFJ Garner » Tue Dec 12, 2006 12:38 pm

Given the enormity of such a task (not to mention the capital required), the private investor may well content himself with trading stock indices.

One drawback is that futures contracts do not exist for every market one might like to cover. And some contracts which do exist for "exotic " markets do not have enough dollar volatility or may be unsuitable for some other reason.

I pointed out elsewhere the (apparent?) shortcomings the CNX Nifty -NSI CSI#742.

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Post by nodoodahs » Tue Dec 12, 2006 3:18 pm

AFJ Garner wrote:... And you would have to be a rather large fund if you were to take every signal.
http://www.blackstarfunds.com/files/Doe ... stocks.pdf

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