Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypotheses

[Ves]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

http://wealthmanagement.com/etfs/can-we-count-absolute-returns

Thanks mate, looks like the equity curve posted is the Credit Suisse Multi-Strategy Hedge Fund Index.

 

[DeepState]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

I wish this forum had the option to hide posts from specified users.

Settings -> Edit Ignore List -> <INSERT NAME>

Go for it.

 

[sinner]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Sinner, been enjoying reading some of your posts since you returned.

The possible strategies behind the equity curve you've linked.... where on the spectrum of active to passive do they fit? What kind of scale is required before transaction costs become too significant etc. I guess what I am really asking, is how suitable are they do Joe Bloggs who doesn't have a big capital base, but has plenty of compounding time, and a basic grasp of finance (and capability / willingness to learn more).

If not relevant to thread, probably a suitable thread on here elsewhere.

Hey mate, consider it a small repayment for the enjoyment I've derived from reading yours

There is no real limit in either direction. Basically the absolute minimum is that you have to be willing to rebalance eventually, and geometric returns will be heavily influenced by how often you are willing to do so. Not by juicing returns but by allowing you to manage drawdowns and harvest/manage volatility. Annual rebalancing is ok, and can even be tax optimised for those not operating under a business structure. Sell your losers the day before FY end and your winners the day after. But obviously the returns will be lower than a quarterly or monthly rebalance.

The same thing applies to scale/transaction costs. Let's say you want to allocate 25% of total to stocks, if you can't afford brokerage on holding 10-20 individual stocks and therefore have to hold the index, obviously you are going to be buying a small amount of crap that adds a drag to returns and increases your overall vol and correlation. By the same token, if you insist on holding 10-20 stocks rather than the index despite being unable to afford it, it'll drag your returns regardless how good the picks are!

The article TH linked mentions "upside vol" vs "downside vol" but personally from my research I prefer to scale on vol regardless of upside or downside. Upside vol spikes are usually associated with bubble highs (e.g. NASDAQ100 tech bubble) or hyperinflation!

So here are a couple of examples (I think probably the newest example which is quite good I already linked in my first reply, Momentum and Markowitz)

3 way (this one is new to me, but it looks pretty interesting, considering how similar the buy+hold curve is to the trend following one)
http://mebfaber.com/2015/06/16/three-way-model/

Permanent Portfolio (I have linked these before but they are appropriate here again - especially good since it illustrates what I described above quite nicely and also includes Japan example where stocks go down forever)
http://gestaltu.blogspot.com.au/2012/08/permanent-portfolio-shakedown-part-1.html
http://gestaltu.blogspot.com.au/2012/08/permanent-portfolio-shakedown-part-ii.html
http://gestaltu.blogspot.com.au/2012/09/the-permanent-portfolio-turns-japanese.html

TAA horserace:
http://blog.alphaarchitect.com/2015...robust-asset-allocation-raa-vs-dual-momentum/

Some other TAA stuff in my original thread post too.

If you're starting small can focus on local, low cost options and diversify as you scale. As the scale increases diversity does allow you to lower volatility and correlations further. For example 25% is "cash" but no reason you can't split that out between AUD, EUR, USD, JPY. Bonds can be diversified by duration or country, stocks by sector, factor, country, etc. Or you can hold 70% in cash and the remaining 30% into whatever Berkshires top 5 holdings are. and so on.

 

[cynic]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Settings -> Edit Ignore List -> <INSERT NAME>

Go for it.

I think Sinner was wishing for a way to conceal posts from a nominated user.

 

[sinner]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

I think Sinner was wishing for a way to conceal posts from a nominated user.

Hehe! Thanks for the concern guys, I took TH/DS suggestion and everything is wonderful.

 

[luutzu]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Hehe! Thanks for the concern guys, I took TH/DS suggestion and everything is wonderful.

You guys are mean. You're going to make me cry.

haha.

 

[Ves]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

So here are a couple of examples (I think probably the newest example which is quite good I already linked in my first reply, Momentum and Markowitz)

3 way (this one is new to me, but it looks pretty interesting, considering how similar the buy+hold curve is to the trend following one)
http://mebfaber.com/2015/06/16/three-way-model/

Permanent Portfolio (I have linked these before but they are appropriate here again - especially good since it illustrates what I described above quite nicely and also includes Japan example where stocks go down forever)
http://gestaltu.blogspot.com.au/2012/08/permanent-portfolio-shakedown-part-1.html
http://gestaltu.blogspot.com.au/2012/08/permanent-portfolio-shakedown-part-ii.html
http://gestaltu.blogspot.com.au/2012/09/the-permanent-portfolio-turns-japanese.html

TAA horserace:
http://blog.alphaarchitect.com/2015...robust-asset-allocation-raa-vs-dual-momentum/

Thanks sinner

I must admit, haven't read about the permanent portfolio for a fair while. Good reminder, the Meb Faber and Alpha Architect links make a lot more sense after reading the Gestaltu pieces.

So basically for the low volality hedge fund strategies a lot of these managers are taking a simple basis for asset allocation like the permanent portfolio and running all sorts of filters across it to 'tweak' the end result in the desired fashion depending on the targeted return / volatility?

Currently I'm running a core & satellite portfolio. The core part is VAS/VGS skewed more towards the international ETF. Satellite is a portfolio of 8-10 stocks at any one time based on Aussie mid-caps that I believe are under-valued based on future cashflows.

The main reason I've switched to core & satellite is for the same reason that craft so succinctly puts it in his post here about "embracing uncertainty." Actually I think if anything the "core" part of my portfolio a lot of self-created stress out of off my stock-picking approach. Not sure how to explain it in words.

I'll start making my way through the rest of the Gestalt blogs... I'm sure there are lots of tweaks that might be useful for me.

Embracing uncertainty seems to be a big roadblock for me in a lot of things in life; so threads like this are incredibly useful.

BTW, with the momentum filters (ie. 100 days moving average line), I assume there are also inversions of this (not sure if they'd call it "value."). Might have missed it in the links.

 

[sinner]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Thanks sinner
So basically for the low volality hedge fund strategies a lot of these managers are taking a simple basis for asset allocation like the permanent portfolio and running all sorts of filters across it to 'tweak' the end result in the desired fashion depending on the targeted return / volatility?

The big guys take full advantage of the extra opportunities they get. So for example, rather than buying the 30Y bond, they might buy the 2Y bond and lever it up to the same volatility level as the 30Y and thus achieve a better Sharpe. Bill Gross of PIMCO fame wrote the seminal paper on that kind of thing. I do have a copy but it's a paid material so I can't share. The title is "Consistent Alpha Generation through Structure" - William Gross. You can see the results of this by looking at the returns on the various PIMCO funds comparing "Plus" funds to the "not Plus" funds. It works.

They will also take better advantage of funding/leverage. Crude example but let's say their model suggests a 125% allocation to stocks, they can achieve that with a better outcome than the average joe.

Currently I'm running a core & satellite portfolio. The core part is VAS/VGS skewed more towards the international ETF. Satellite is a portfolio of 8-10 stocks at any one time based on Aussie mid-caps that I believe are under-valued based on future cashflows.

The main reason I've switched to core & satellite is for the same reason that craft so succinctly puts it in his post here about "embracing uncertainty." Actually I think if anything the "core" part of my portfolio a lot of self-created stress out of off my stock-picking approach. Not sure how to explain it in words.

I know exactly what you're trying to explain! Nothing wrong with the concept you espouse, my only concern would be that during periods of high volatility you will find that the correlation of your portfolio to be essentially 1. So while you might find your choice to be more performant during "good times" it will be not so different from the index (and on a random chance basis, worse) during downturns. Again, nothing wrong with this, but you will find it is pretty much the opposite goal of the above portfolios (get some returns during good times limited because you're also holding cash and bonds and whatever but suffer less drawdowns during bad times).

BTW, with the momentum filters (ie. 100 days moving average line), I assume there are also inversions of this (not sure if they'd call it "value."). Might have missed it in the links.

What you will find is that on a technical basis the proxies for value are not the perfect inverse of the proxy for momentum!

So, for example, momentum generally appears on short term timescales (<~250 days, >~40 days) so you would want your "Rate of Change" or "RSI" or "Moving Average" to be set appropriately and thus actually capture the movements. There is a high correlation between these signals and whatever the market is most currently interested in.

"Value" (note the inverted commas) might argue that returns can also be had from whatever the market is least interested in. But does the negative <1y return on assets dictate market disinterest? No. What you will find is it is more like, >3-5y. So assets which performed the most poorly over the last 5y might be expected to outperform strongly over the next 5y (not 1y!!!) period. Kind of easy, rank by the worst 5y total return and buy the top decile for 5y. If you wanted to use a squiggly line, I might suggest something a little more complicated, like 2 standard deviations below the 3y avg (no idea if that would work, just a random example).

There is actually a lot of evidence for this kind of behavioural stuff, popular stocks get overtraded and thus return less, unpopular stocks are undertraded and therefore built in return factor. Popular stocks get overvalued, unpopular stocks undervalued, etc.

For more on this, see the paper I linked in the first post titled "Value and Momentum everywhere".

 

[craft]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Currently I'm running a core & satellite portfolio. The core part is VAS/VGS skewed more towards the international ETF. Satellite is a portfolio of 8-10 stocks at any one time based on Aussie mid-caps that I believe are under-valued based on future cashflows.

The main reason I've switched to core & satellite is for the same reason that craft so succinctly puts it in his post here about "embracing uncertainty." Actually I think if anything the "core" part of my portfolio a lot of self-created stress out of off my stock-picking approach. Not sure how to explain it in words.

I'll start making my way through the rest of the Gestalt blogs... I'm sure there are lots of tweaks that might be useful for me.

Embracing uncertainty seems to be a big roadblock for me in a lot of things in life; so threads like this are incredibly useful.

Probably managed to get this thread of track more than most.

But to my warped line of thinking there is relevance in talking about uncertainty in an evidence based thread. As the greater return you reach for the less robust the evidence becomes.

None of this evidence, just my beliefs. If you stay in the markets long enough you get to know that you don’t and can’t know a lot of stuff. (The beginner’s cycle of looking for certainty has finished) .
What do you do next? Disbelieve that uncertainty must prevail and re-enter an advanced beginners cycle, there’s got to be something out there that I don’t understand yet that will give me the certainty – neural networks advanced academic theory something.

Lower the risk, comprehend that you can’t reach for the upside without opening yourself to the down side. Couple of options now – get out completely, Risk only a small part of your wealth on high risk. Expose as much of your wealth as you can to lower risk strategies and perhaps a little more where the best evidence actually exists.

Continue to chase high returns in the face of fully comprehended uncertainty. To do this causes what I believe they call Cognitive dissonance, holding two completely opposing views at the same time. This is very uncertain plus I still retain confidence. Living your life with constant cognitive dissonance is very difficult – you will always want to ease it by reducing size, seeking out certainty or slipping into overconfidence and dismissing the risks. I think the exceptional traders can hold themselves in cognitive dissonance and keep the right balance between uncertainty and confidence. For some reason I can maintain the required Cognitive Dissonance with Investing at the moment but I couldn’t with trading – IF I didn’t relieve the pressure by trading smaller I would become an emotional train wreck, the outcome didn’t matter up or down I couldn’t handle either at size. That’s why I don’t trade anymore. I couldn’t scale.

I have an analogy that helps me understand it from white water kayaking. Sit at the top of a grade 5 Rapid and feel the emotion, there’s no certainty, you can’t completely control the environment you are about to enter. You have to accurately judge your skills if you don’t have the requisite skill you definitely going to get a major trashing or even die. Even with the best judgement and all the skill in the world it could still go wrong. You only paddle the rapid, push 'your' envelope if the risks rewards of doing so mean you have too because that simply is what living means to you. This risk/reward in the face of uncertainty is so personal and ever-changing throughout life that it can’t be assessed by anybody but yourself and there is no right or wrong answers.

I think the smartest guys who recognise the uncertainty and don’t want – don’t need financially or psychologically to live a life in cognitive dissonance choose a path of lower return seeking. I don’t think I’m far away from following them. Getting too old to be an adrenalin junky – yet I don’t know if I could enjoy life without pushing my investment boundaries so I’m not too certain when the switch for me comes. Core – satellite is where I think I too will eventually head. So thanks to Sinner, Ves, Deep State etc – the links and posts put up are read and appreciated even if not commented on.

Sorry for the ramble, writing it down helps - normally I delete, but maybe this strikes a chord somewhere.

 

[sinner]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Sorry for the ramble, writing it down helps - normally I delete, but maybe this strikes a chord somewhere.

Woweeeeee golden stuff here craft.

Probably managed to get this thread of track more than most.

But to my warped line of thinking there is relevance in talking about uncertainty in an evidence based thread. As the greater return you reach for the less robust the evidence becomes.

None of this evidence, just my beliefs. If you stay in the markets long enough you get to know that you don’t and can’t know a lot of stuff. (The beginner’s cycle of looking for certainty has finished) .

Also, studying history! The financial markets are older than 100 years and the lessons from before 1915 have proven to be not dissimilar to the lessons from after.

What do you do next? Disbelieve that uncertainty must prevail and re-enter an advanced beginners cycle, there’s got to be something out there that I don’t understand yet that will give me the certainty – neural networks advanced academic theory something.

Having been through this exact process I can happily inform you that you merely end up circling around to the same realisation.

Perhaps the only additional acknowledgement attained is that it is possible for high ROI "strategies" to begin working, continue working for just long enough to be attained by a critical mass of "winners" and then basically never work again. Ever. Sometimes due to short term economic circumstance, or whatever. I accept/acknowledge that it is possible to generate significant long term alpha by discovering, utilising and discarding these strategies at a high turnover. I made some machine learning stuff to do this but as it turns out the return profile is pretty much the same as selling options vol, superawesome during good times and "there goes your net worth" during bad times (so why not just sell some options vol).

Lower the risk, comprehend that you can’t reach for the upside without opening yourself to the down side. Couple of options now – get out completely, Risk only a small part of your wealth on high risk. Expose as much of your wealth as you can to lower risk strategies and perhaps a little more where the best evidence actually exists.

If you rely on only your experience in the markets then your ability to manage risk is significantly reduced. As a simple example, you state "get out now". "Getting out" normally entails going to cash. But most investors experience today does not include experience of a wide range of economic circumstance. Not many consider what an energy shock might do to their portfolio, or a currency crisis. This includes the "smartest people in the room" who often view reality through the lens bestowed upon them by their Harvard degree in Macroeconomics.

Aligning with positive convexity in returns can be achieved for those who have the ability to identify unconsidered risks (be they behavioural, idiosyncratic, systemic, etc) and front-run purchase currently "undesirable" yet still "quality" assets before they are in demand due to whatever risk.

A good example is purchasing a put option, another might be the globally diversified Permanent Portfolio.

Continue to chase high returns in the face of fully comprehended uncertainty. To do this causes what I believe they call Cognitive dissonance, holding two completely opposing views at the same time. This is very uncertain plus I still retain confidence. Living your life with constant cognitive dissonance is very difficult – you will always want to ease it by reducing size, seeking out certainty or slipping into overconfidence and dismissing the risks. I think the exceptional traders can hold themselves in cognitive dissonance and keep the right balance between uncertainty and confidence. For some reason I can maintain the required Cognitive Dissonance with Investing at the moment but I couldn’t with trading – IF I didn’t relieve the pressure by trading smaller I would become an emotional train wreck, the outcome didn’t matter up or down I couldn’t handle either at size. That’s why I don’t trade anymore. I couldn’t scale.

Yup, can empathise with this here big time. I started out trading leveraged FX and consider it mostly luck (certainly no skill on my part) that I didn't get my figurative head blown off on a liquidity event. After trading USDJPY during the night of the Flash Crash (May 6 2010) I started to develop mental scars, even though that night I had made money it was the first time I recognised how lucky I was the move didn't go the other way. That's when I started to look at other markets and moving away from intraday stuff and so on. After a while I quit intraday altogether. Events since then have left me feeling vindicated with my choice.

I think the smartest guys who recognise the uncertainty and don’t want – don’t need financially or psychologically to live a life in cognitive dissonance choose a path of lower return seeking. I don’t think I’m far away from following them. Getting too old to be an adrenalin junky – yet I don’t know if I could enjoy life without pushing my investment boundaries so I’m not too certain when the switch for me comes. Core – satellite is where I think I too will eventually head. So thanks to Sinner, Ves, Deep State etc – the links and posts put up are read and appreciated even if not commented on.

I feel like I have found a pretty happy balance, I keep most of the stuff generic and leave myself some room to play (I guess pretty much exactly the Core/Satellite that Ves described above).

 

[galumay]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

craft, sinner, ves, that discussion is worthy of splitting off into a thread of it's own - and given how far its getting away from tech-a's initial question, probably should be!

The quality of your discussion on this last page is exceptional, its so thought provoking and resonated extremely srtongly with me. Its these sort of discussions that make ASF such a wonderful resource and I am humbled that you guys take the time and effort out of your lives to contribute to such discussions.

Its going to take me a coupe of readings, and following up on some of the references to fully absorb, but I felt like there was some lightbulb stuff in there - especially around the combination of intellect/knowledge/experience and the interface with human psychology.

Thanks again for your contributions, here and elsewhere on ASF.

 

[The Falcon]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

Yes I concur Galumay. Very good stuff guys, appreciate you taking the time.

 

[barney]

Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth

To do this causes what I believe they call Cognitive dissonance, holding two completely opposing views at the same time. Living your life with constant cognitive dissonance is very difficult.

Sorry for the ramble, writing it down helps - normally I delete, but maybe this strikes a chord somewhere.

Another great post above thanks Craft

Slightly off topic but in relation to cognitive dissonance ....... musicians will appreciate the parallel, but for the non musical ......

One of the most harmonically appealing chords is the Major 7th chord (nearly every love song in the world has Major 7th chords......

If we play say a DMajor7th chord it contains all the regular notes of a standard D chord plus an added C# (played up an octave higher) ....

If you were to play a D and a C# note simultaneously (without being spread by the distance of an octave), it sounds more like the score from an Alfred Hitchcock movie:badsmile:, yet when the notes are spaced far enough apart the potential dissonance takes on a form of almost perfect harmonic beauty:engel: ......

Perhaps the frustrating dissonance we often find in trading is no more than having the "chord structure" in the wrong order!