Shutting down our small fund

[MarkS]

Just as an FYI or data point:

18 months ago, a friend and I put together a small fund for a few friends that we papered up to be exempt for registration purposes and launched with $250k of speculative capital. Traded across 48 markets using a slightly modified version of the Donchian breakout program included in TB. That fund was liquidated by us this morning as we reached our pre-determined stop-loss point of 50%.

In live trading, we had ratcheted the risk down by 45% over what we tested historically in our simulations. We also started trading while the simulation was showing the system in a drawdown going well into its second year (at least with our chosen markets and specific system parameters). We briefly made a 10% gain in the first quarter, but the drawdown never really ended, and we reached our agreed-upon pain point of 50% after 18 months.

I know the drawdowns historically have run longer than (and just as deep as) what we are currently experiencing, but our investors/friends all have profitable businesses with which they can generate consistent ROI so thought was always that they can take the left-over capital and recycle to recoup the losses. Also, even if we did dig ourselves out of this hole over the next 2+ years, the historical returns would be much too volatile (in our opinion) to ever raise any fund of significant stature.

Not posting this for pity or as a warning as we all are aware of the risks of trading. But simply as another data point for whatever that is worth. As more funds like mine shake out, perhaps trend following will then be back in positive mode for the remaining folks. Best of luck to all -- I think I'll save my future speculations for the industry in which I generate my living from!

[LeviF]

What did your hypothetical risk & return profile look like prior to commencing trading?

[MarkS]

Levi -- which stats do you want to know? The R^3? The MAR? CAGR? Percentage risk per trade?

[Toosday]

Mark,

Thank you for sharing and best of luck to you. It has been a rough two years for trend following and given JWH's news you are not in weak company.

[rhc]

‘MarkS’, sorry to hear that news. Hopefully you’ll bounce back again.
Trust me when I say that I feel your pain on this one as this last year and a half has been a difficult time for me as well . . . at least as far as trading is concerned.
However, thanks kindly for posting another small piece of evidence that some traders are doing it tough in today’s environment.
Sorry to say this but, I suppose, this is somewhat encouraging as it seems that we may be at the point just before 'dawn' (although I said that last year as well!! )

Other encouraging informal evidence includes;
- Mr Henry (i.e. JWH) has seen assets under management drop below critical levels. (i.e. Shut shop time)

- Many ‘Market wizards’ as followed by forum member ‘Jezliberty’ at his blog are at 2+ year drawdowns & also doing it tough this year

- Blox forum postings to have slowed right down & quite a few posts have been grumbling about how markets are more difficult or it could be different this time or the rules have now changed etc etc

- Attain capital, just last week, issued a newsletter titled “Is trend following deadâ€

[AFJ Garner]

Dead or not (and I don't believe it is dead) things HAVE changed. It is more difficult to make money out of trend following over the past decade. Increased noise and less "efficient" trends coupled with the increased correlation mean that you need to lower leverage and volatility to avoid getting blown out of the water. Trend following has become commoditised and as many forum members have found, this makes it very difficult to raise either seed capital or AUM for the small fry and newcomer.

TF is easy to learn given a modicum of application and intelligence and the barriers to entry are slim. Small guys sitting in their garage with a laptop can compete with the big guys sitting in posh offices. Admittedly the regulatory front has made this more complex but again the mushrooming of hedge fund hotels has made this easier, given the fact you can rent a regulatory umbrella.

You are quite right though that the hours before dawn are the toughest. Psychology plays a much greater role in survival than I ever gave it credit for.

[Chuck B]

I have no answers or great insight other than all the others excellent comments and insights on this same subject (TF) over the past year or so, but we do know one thing is profoundly "different" than anytime in our lifetimes: the rate of change of total credit growth. If you just look at the US total debt (public + private) growth since 1970, it followed a nice exponential curve, doubling every 5-7 years, etc, up until 2007.

When that credit bubble popped in 2008, a natural correction to that unprecedented rush to that peak was *not* allowed to happen. Instead fiscal authorities and central bank authorities stepped in to bail out those aspects of the bubble that should have been allowed to fail. Yes, it would have been a brutal depression, probably very sharp decline but followed by an equally sharp rebound similar to Iceland's response to the bubble. Instead we are stuck with this "fake" economy in all developed world countries. However, a substantial foundation for the future would have been built in the rebound as the junk was flushed from the system.

Said fake economy has been on oxygen via central bank manipulations, free money creation, buying junk assets at par value, the Fed buying almost all of the 10+ year maturity new issue debt, etc. Everyone in the system is hoping, praying, that some miraculous "recovery" will take place, that all of the sudden the developed world will jump right back onto that exponential credit growth curve and restart total debt doubling every 6 years again, and that all of their manipulations will not have created a massive mal-investment bubble that will cripple said economies for years to come.

So what the heck is my point here? Damned if I know. I guess it's just that all the developed economies *are* different this time. It would be easy to bury one's head in the sand, put the nose to the grindstone and forge ahead with some inner belief that if you just keep at the plan long enough it will turn around. After all that is the history over the past 40 years or so, right? I would agree 100% with that assessment if all these mechanisms creating a fake pricing in world's markets were not in place. This is financial repression 101, 201, 301, 401 and as of September here in the USA, financial repression is now in grad school with 501 and 601 level courses in progress.

Just imagine if tomorrow all the world's central banks said no more money creation and we're going to sell off all these junk assets over the next five years so that we can return to a "normal" central bank functioning as soon as possible. Where would the S&P price within 2-3 months? Where would the long bond price? The currency cross-rates, gold, crude, cattle, copper, etc?

That's the problem in my eye. It's all fake due to financial repression. Just look at the monthly chart of AAPL I posted a couple of months ago as it reached 700 showing a horrifically small and declining volume on the whole rally this year from the 300s. IBM shows a similar declining volume on the monthly as does the overall market and many other stocks.

The old technician in me saw (sees) all of that as evidence of a "fake" market sucking in the unwary, all related to massive mal-investment being created by the central banks actions and plans. Another one is "dividend stocks" -- think about that one for a moment. The entire investment world is clamoring for yield since you get next to nothing (or pay out money in German, Swiss, etc short term debt) on bonds (and a negative real yield), so the masses are "being forced" to buy "dividend stocks" to get yield. I've kept some notes this year on specific issues being put forward in the "media" on this subject -- stuff like when INTC was in the high 20s earlier this year and being compared to the 10yr T-note where INTC was yielding twice was the note was yielding "but you have to opportunity for 'growth' with INTC". Now that anyone buying that missive from the pundit has lost about 9-10 years of "yield" in the price decline, you have to wonder how long these "dividend investors" will put up capital loss. 30%, 40%, 50%? Who knows, but just another example of mal-investment bubbles being inflated by the Fed et al.

/rant off -- time to enjoy this wonderful 60+F sunny day here in North Carolina.

[MarkS]

First, thanks for the condolences. Rhc -- you made me laugh, something I needed. And I hope the rest of you are right, and that I am helping along that shakeout, similar to when the last momentum buyer exhausted his capital in April of 2000, or the last liar mortgage was issued in July of 2007!

As for the "this time is different" or not argument, I think that in the end, especially if you want to manage money, the volatility of trend following is hard to overcome in a sale pitch. As I mentioned, being down 50% over 18 months -- how do I sell that to wealthy individuals even if I come back? I'm not going to beat a dead horse as this has been discussed many times in the past, but for a rich person, the utility of making an extra dollar is far outweighed by the pain of losing a dollar. They are more into wealth preservation than wealth expansion, and having 5 year drawdowns or years of 20-30% losses doesn't fit into many of their world views.

AFJ/Chuck - great points, and it makes me wonder... say things have not changed but are just this way for (let's say for sake of argument) 15 years then revert back to "normal". Why is a 15-year time span where things aren't the same considered an exception? For many, that is almost 1/2 or more of their entire career in finance, so for them perhaps it should be considered normal? I don't have the answers, just musing aloud. And if you grind it out for 15 years and barely survive, are you really better off than the person who remains nimble and makes good money over that time frame? Reminds me of Jim Rogers calling for a commodity bubble for almost twenty years, and then when it finally happened, he told everyone "I told you so". Always makes me chuckle.

Anyway, off to play with the kids. Good luck to all of you and I look forward to hearing about successes! BTW -- 60 degrees sounds so nice, given I'm looking at frost on the grass here in Chicago!

[Chris67]

chuck b - I think that is an excellent summation - brilliant

C

[fab1usa1]

In May 2012 I suspended trading my long-only LTTF stock system. While I do not have any money currently riding on it, I do monitor its theoretical performance. Perhaps one day I will reactivate it.

Since that time I purchased several end-of-day swing trading systems for stocks. I am happy with its performance so far. In addition, I expanded into forex and purchased a system that runs 24/5 on tick data using minimum lot size. So far so good but I get better return and lower drawdowns with the stock systems.

The lesson that I learned is to diversify your trading methods, don't put all your eggs into one basket as they say.

[jas-105]

Mark.
Sorry to hear you have had to close your fund, my partners and I started our fund in June last year so a very similar time to yours it seems but we set a 3-year timeline for the business and funded it accordingly, I just hope (and pray) that we see the markets free up soon enough.
Following on from Levi's question, it would be very interesting to hear what level of volatility and returns you were targeting from the outset and how this compared to what you actually got. Also, how much data were you using for historical backtesting ?
It's well documented that David Harding reduced leverage around 2009 and it's looking like a very good call if it was actually done for reasons of investors expectations rather than pure asset accumulation. I think that using high leverage in TF models is wrong from a business perspective, most institutional investors want lower volatility even if fees are higher and long term returns are lower as a result, as daft as that sounds.
Anyway, thank-you for talking about your fund closure on the forum and best of luck with whatever you do next.

[AFJ Garner]

Chris67 mentioned these guys on another thread: http://www.iasg.com/groups/group/distri ... rogram#all I had not come across this outfit before but apparently the lady who runs it began working in the business with her father in 1978. They are in a draw down of almost 63% before October results are in - almost 50% greater that than previous maximum draw down.

This adds to the number of very long established managers facing their worst period since inception and follows the nemesis of Dunn and JWH back in 2005/6

[Chuck B]

AFJ/Chuck - great points, and it makes me wonder... say things have not changed but are just this way for (let's say for sake of argument) 15 years then revert back to "normal". Why is a 15-year time span where things aren't the same considered an exception? For many, that is almost 1/2 or more of their entire career in finance, so for them perhaps it should be considered normal? I don't have the answers, just musing aloud. And if you grind it out for 15 years and barely survive, are you really better off than the person who remains nimble and makes good money over that time frame? Reminds me of Jim Rogers calling for a commodity bubble for almost twenty years, and then when it finally happened, he told everyone "I told you so". Always makes me chuckle.

I've been working on my market maps and trying to add branches (these are mind maps ala Tony Buzan) whenever possible that actually don't have content yet but just a theme. The reason is that I'm trying to "let go", in the Jimmy Sloman sense lol, of attachment to my market past. It's still very valuable, all that experience, but being attached to it will likely create a large potential for downfall going forward. It's hard, but I'm trying to see it for what it is. We may and probably will not ever return to what we all would call "normal" in our worthwhile investing lifetimes (thinking here over the next 20-30 years). Too much has been altered to simply have all these manipulations disappear in the near future and have a non-crony, non-manipulated free market society growing total debt in that exponential fashion once again. This is just one branch on the map, since I have to allow for the branch that has that *not* happening too, along with others...

One belief branch on my mindmap is titled "Will not fail", and that is the central banking branch and sums up their thinking in my mind. These few unelected individuals possess a HUGE amount of power over essentially everyone, and they truly believe that, no matter what happens, they will *not* fail in their mission. Since they are not measured on actual outcomes, my feeling is that this is the most important branch on my mindmap. The branch with the most possible singularities, the most possible black holes, the highest possible risks of undefined proportion.

In any event this whole exercise I've been working on for a few months is allowing me to create the "big picture" as my dad always drilled into me a as kid, to see the entire picture with all possible and impossible inputs and outputs noted. I'm trying to get my arms about the next 10-15 years and while not specifically nailing down one trading plan but instead creating a wealth of potential plans and paths in order to be mentally prepared to shift course rapidly when/if need be.

The whole world is attached to the "return to normal", and I view that as a huge potential hook (hook, as Don Worden called them in markets where you take a technical feature that has been present in all past market moves like you're experiencing and then inappropriately apply it to a current situation and hence hooking yourself into a story that isn't working), a viewpoint, and perhaps best labeled as an inappropriate measuring point. Who cares if we get back to the employment levels of 2007 here in the USA (long way to go) if the whole system is propped up on fake money and mal-investment with no substantive foundation?

So the whole world, all central banks, all media, etc, is focused on this "return to normal", and the contrarian part of me is wary of the single minded focus. Kind of like that saying that life is what happens while your making plans. While everyone is waiting/hoping/planning on this vaunted "return to normal", life will happen, and the vast majority will be mal-invested and unprepared most likely.

[AFJ Garner]

I'm trying to "let go", in the Jimmy Sloman sense lol, of attachment to my market past. It's still very valuable, all that experience, but being attached to it will likely create a large potential for downfall going forward. It's hard, but I'm trying to see it for what it is. We may and probably will not ever return to what we all would call "normal" in our worthwhile investing lifetimes (thinking here over the next 20-30 years).........
..............
In any event this whole exercise I've been working on for a few months is allowing me to create the "big picture" as my dad always drilled into me a as kid, to see the entire picture with all possible and impossible inputs and outputs noted. I'm trying to get my arms about the next 10-15 years and while not specifically nailing down one trading plan but instead creating a wealth of potential plans and paths in order to be mentally prepared to shift course rapidly when/if need be.........
.................

I am thinking along exactly the same lines as you are. My years of experience and trading need to be re-assessed to make a sound plan for the future. I don't think it is something to be hurried.

[jas-105]

Chris67 mentioned these guys on another thread: http://www.iasg.com/groups/group/distri ... rogram#all I had not come across this outfit before but apparently the lady who runs it began working in the business with her father in 1978. They are in a draw down of almost 63% before October results are in - almost 50% greater that than previous maximum draw down.

This adds to the number of very long established managers facing their worst period since inception and follows the nemesis of Dunn and JWH back in 2005/6

over 15 years with just $2m of aum, they deserve an award for persistence if nothing else.

[Roscoe]

Hey Mark, sorry to hear your story but thanks for telling it, it is instructive as have been the many great responses and Chuck has described the overall situation very eloquently, thanks gentlemen.

My story is slightly different: I started trading my current portfolio in August 2010 (after my divorce, which stopped me cold there for a time) and traded up to 6 times my starting account size in the first year for about a 30% drawdown (better than tested). The later part of 2011 into 2012 gave me an equity curve that was a bit choppy and as of July 2012 I was up 5 times my starting account size. Then PFG took me out of the market, where I have been ever since. Since then I can only report theoretical values: the equity curve is still chopping about with open equity currently sitting at 5.4 times my starting account size. Current drawdown is 28%, worst has been 40% (only slightly worse than tested). So yeah, a tough time for trend following.

I feel for anybody trading OPM, very difficult to explain to investors I am sure.

My conclusion from all of this is that I need to look at smaller timeframes where trades last from a few days to a week or two, in contrast to my current model where trades lasted months. Taking smaller bites with a lower variance in trade PL’s seems to me to be the logical response to these times - get in, get out with a smaller but more consistent PL and look for the next signal. And of course that will increase the granularity for position-sizing.

[MarkS]

Roscoe -- always great to hear about a positive run. Hats off. How would your system have worked if you had started at the end of Spring 2011 when I did? I am beginning to see how much luck/timing also plays a part in all this!

Jas-105 -- I have the original test runs in front of me (the one I handed out to my friends in the "pitch"). The backtest was done over 21 years (Jan 1990- Dec 2010); my partner and I had reasoned that the trading in the 1950s-1980s was not relevant anymore due to computers, electronic trading, etc. Thought originated from a pit trader who said once things began to go electronic in his arena, the character of his market totally changed. We ran my quad-core laptop into the ground with the backtests over 4 months, running test after test 24/7, and then chose the parameters that were in the middle of strong returns (looking for that elusive "robustness"). The final results were what you'd typically find optimizing a TF system: twenty year track-record with a MAR of 1.35, Sharpe of 1.12, Max DD of 44%, longest drawdown of 19.6 months, R3 of 2.13.

We convinced ourselves that if reality was even 1/3 as good, it would be a great system to trade with speculative capital on the side and a diversification from our regular activities.

The actual results are a bit difficult for me to pinpoint because of 1) our changing the risk parameter from overly conservative mid-way back to our more normal "Tested" parameter, and 2) on occasion a trade was registered (or not) by TB that did or did not happen in real time trading, so per some recommendations from this board, plan was to reset every Jan 1st with the latest equity value and start clean. Don't know if I'm explaining myself correctly.

Anyway, if I just run the simluation over the exact time-frame, I do get relatively close to the actual performance, and you can see the numbers are night/day: MAR of -0.62, Sharpe of -6.13, Max drawdown of 58.1%, longest drawdown of 18.6, and an R3 of -13.04.

Shows our average winner was 60.4 calendar days and loss was 22.0 days.

14 losing months, 6 winning months.

Currencies smoked us.... BP 0-for-9; AD: 1-for-3;CD: 1-for-8; MP: 1-for-9...so on and so on. Makes sense given all the government intervention and see-saw on giving Greece a bailout/not giving Greece a bailout.

Anyway, hope you find these post-mortem stats of use in some way.
Mark

[Chuck B]

Mark,

No doubt the character of a market changes once it goes electronic, but I'm not sure I would discount prior period data too much just because of that change. In reality, we all need a few thousand years of market data to even get close to some great realization of long term trendfollowing in my opinion.

The things that really change when the pit goes away was the anchor the pit provided, the relative slowness of the market, the capacitance/inductance of the market -- that essentially disappears with electronic trading, so we end up with are all the HFT runs (daily in the US stock market on individual issues, where what look like anomalies in intraday data turn out to be validly traded prices, i.e. a 45 second up and back that is a multiple of the daily ATR), and the illiquid order fills at key points (potential greater slippage for TF order execution) and most importantly being stopped into new positions or out of open ones by those wicks that retrace right back as the consolidation or trend resumes, respectively. What we may end up with also is some "feature" to market data that is longer term than intraday (a couple of days to a week?) that is representative of all the algos interacting with each other at times? Perhaps other features as well.

From a pit trader's perspective, the world ends, literally and figuratively. How they made a living, perhaps for many years, disappears for essentially all of them. The LIFFE traders experienced this first way back in the late 90s when all the US guys were saying the pit was "clearly the future." A good friend of mine was one of the biggest locals in the STIR pits, and I experienced the end of the pits through him back then. I last visited the LIFFE in 1998 just after the Bund pit emptied out going to the Eurex, but the STIRs were still going strong. His methods, systems, risk management, etc, *all* became essentially useless in the electronic world. Fortunately for him, he was way ahead of the game starting to create daily data systems many years before. Anyway, I would guess that any pit trader would think everything from the past is useless when in fact it might not be as bad as that.

Thanks for your post on your experiences, and I agree 100% on your start date comments. Of course the other big factor is "how" one starts a system on multiple markets. 20 years ago when I was creating my first LTF system using Trading Recipes, TR had the assumption that one would start real life trading by taking all new trades presented once you "start." Hence it had this feature where it would cycle through a system/markets one day at a time and present you with data (worst case analysis I think Bob called it) showing the variance of your system results as a function of start date. My eyes were opened wide at those results, and I did a humongous number of runs of my systems and markets groups using that feature -- back then on three computers I had dedicated to the task (486/66, Pentium 90 and an old 386/33 with a math coprocessor ).

So circa ~1993 I had a talk with Tom Basso about the whole concept of how you start a system. He, being focused on OPM, proclaimed that you had to have a method that gives all clients identical access to your equity curve -- meaning you "assume the equity curve" for a new account. Otherwise you are biasing your client's returns with respect to each other, and inadvertently disadvantaging some compared to others. So his take was you enter into all the open positions on the day the account is opened with proper risk-sized positions to equate everyone onto your equity curve. His further thought was that he couldn't imagine not starting a personal account in the same fashion as opposed to simply waiting around for new trades to appear in the system in some future date.

So those were the two opposing schools of thought way back then. Two decades later, I guess they are the same today.

[Roscoe]

I am beginning to see how much luck/timing also plays a part in all this!

Agree totally, the starting point seems to me to be all about luck. I figured that after 3 years and 30+ trades had passed I might have had at least the basis to consider using statistical measures of performance from there on in. Sadly I didn't get that chance. If I ever get anything back from the PFG mess I can start all over again.

In response to your question: starting May/June 2011 - CAGR 10.1%, MDD 45%.

[cymond]

Mark and Roscoe - Really sorry to hear about the sad outcomes for your trading.
As if the markets weren't bad enough, the breaching of the principle of the safety of customer funds is no doubt the ugliest additional risk that we all now have to endure in this new reality.

It really underscores what Chuck posits, in the great post above, about the markets having changed beyond recognition.
The challenge it to adjust appropriately. Anything that increases the margin of safety.