annual review Archives

2013: Lessons Learned and Revisiting Some Studies

The year is over in a few hours and I thought it would be nice to do a quick review of the year, revisit some studies and the most popular posts of the year, as well as share some thoughts on my performance in 2013 and my goals for 2014.

Revisiting Old Studies

IBS

IBS did pretty badly in 2012, and didn’t manage to reach the amazing performance of 2007-2010 this year either. However, it still worked reasonably well: IBS < 0.5 led to far higher returns than IBS > 0.5, and the highest quarter had negative returns. It still works amazingly well as a filter. Most importantly the magnitude of the effect has diminished. This is partly due to the low volatility we’ve seen this year. After all IBS does best when movements are large, and SPY’s 10-day realized volatility never even broke 20% this year. Here are the stats:

UDIDSRI

The original post can be found here. Performance in 2013 hasn’t been as good as in the past, but was still reasonably OK. I think the results are, again, at least partially due to the low volatility environment in equities this year.

UDIDSRI performance, close-to-close returns after a zero reading.

DOTM seasonality

I’ve done 3 posts on day of the month seasonality (US, EU, Asia), and on average the DOTM effect did its job this year. There are some cases where the top quarter does not have the top returns, but a single year is a relatively small sample so I doubt this has any long-term implications. Here are the stats for 9 major indices:

Day of the month seasonality in 2013

VIX:VXV Ratio

My studies on the implied volatility indices ratio turned out to work pretty badly. Returns when the VIX:VXV ratio was 5% above the 10-day SMA were -0.03%. There were no 200-day highs in the ratio in 2013!

Performance

Overall I would say it was a mixed bag for me this year. Returns were reasonably good, but a bit below my long-term expectations. It was a very good year for equities, and my results can’t compete with SPY’s 5.12 MAR ratio, which makes me feel pretty bad. Of course I understand that years like this one don’t represent the long-term, but it’s annoying to get beaten by b&h nonetheless.

Some strategies did really well:

Others did really poorly:

The Good

Risk was kept under control and entirely within my target range, both in terms of volatility and maximum drawdown. Even when I was at the year’s maximum drawdown I felt comfortable…there is still “psychological room” for more leverage. Daily returns were positively skewed. My biggest success was diversifying across strategies and asset classes. A year ago I was trading few instruments (almost exclusively US equity ETFs) with a limited number of strategies. Combine that with a pretty heavy equity tilt in the GTAA allocation, and my portfolio returns were moving almost in lockstep with the indices (there were very few shorting opportunities in this year’s environment, so the choice was almost always between being long or in cash). Widening my asset universe combined with research into new strategies made a gigantic difference:

The Bad

I made a series of mistakes that significantly hurt my performance figures this year. Small mistakes pile on top of each other and in the end have a pretty large effect. All in all I lost several hundred bp on these screw-ups. Hopefully you can learn from my errors:

Back in March I forgot the US daylight savings time kicks in earlier than it does here in Europe. I had positions to exit at the open and I got there 45 minutes late. Naturally the market had moved against me.
A bug in my software led to incorrectly handling dividends, which led to signals being calculated using incorrect prices, which led to a long position when I should have taken a short. Taught me the importance of testing with extreme caution.
Problems with reporting trade executions at an exchange led to an error where I sent the same order twice and it took me a few minutes to close out the position I had inadvertently created.
I took delivery on some FX futures when I didn’t want to, cost me commissions and spread to unwind the position.
Order entry, sent a buy order when I was trying to sell. Caught it immediately so the cost was only commissions + spread.
And of course the biggest one: not following my systems to the letter. A combination of fear, cowardice, over-confidence in my discretion, and under-confidence in my modeling skills led to some instances where I didn’t take trades that I should have. This is the most shameful mistake of all because of its banality. I don’t plan on repeating it in 2014.

Goals for 2014

Beat my 2013 risk-adjusted returns.
Don’t repeat any mistakes.
Make new mistakes! But minimize their impact. Every error is a valuable learning experience.
Continue on the same path in terms of research.
Minimize model implementation risk through better unit testing.

QUSMA