Alternative Investments -Measuring Performance

How to measure performance between accounts.

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Dealing in Alternative Investments requires a bit of statistical knowledge (the more the better).  So I picked out one component that would benefit someone who handles their investments personally and, at the same time, benefit someone who pays an advisor because it never hurts to ask the right questions.

The following is not investment advice, but one way to assess the advice you were given…

High Frequency Trading or Unconventional Return Periods

When returns are realized at higher frequencies (many times per year), Sharpe Ratios and the corresponding t-statistics can be calculated in a straightforward way.

Assuming there are N return occurrences per year, and the mean (μ) and standard deviation (σ) of the returns are μ and σ, the annualized Sharpe Ratio can be calculated as (μ×N)/(σ×√N) …or (μ/σ)×√N.

The corresponding t-statistic is (μ/σ)×√(N × number of years).

For monthly returns, the annualized Sharpe Ratio and the corresponding t-statistic are (μ/σ)×√12 and (μ/σ)×√(12 × number of years), respectively.  Here, μ and σ are the monthly mean and standard deviation of returns.

Similarly, assuming μ and σ are the daily mean and standard deviation for returns (you traded every day the market was open…please don’t do that:) and there are 252 trading days in a year, the annualized Sharpe Ratio is (μ/σ)×√252 …the corresponding t-stat is (μ/σ)×√(252 × number of years).

The calculators I use to find these metrics are listed in the right-hand column on “my trading desk.” They both have statistical functions.

The Test Statistic

Test Statistics (t-stat,t-statistic) are tricky creatures.  Essentially when evaluating performance, I require a t-stat of 4 or more (the higher the better) before considering a stake.  In the future, I will explain a simple model I use to allocate cash among accounts and strategies according to their t-stat.

Now, here is a simple formula to estimate a t-statistic for unusual return periods:

Test statistic= (μ/σ)×√(N return occurrences × number of years).

Note that “N return occurrences×Number of years” is just the total number of return occurrences resulting from the investment or strategy (either positive or negative).  So, if you closed out 3 trades (at 1%, -2.3% and 3%), that counts as N=3.

Or, if your investment reconciles every 6 weeks, for the past 1.5 years then N=13, (78 weeks / 6).

Remember, it is important to convert your daily/weekly/monthly returns to an annual (yearly) number.  This makes it very easy to compare performance against conventional, low-return investments pushed by financial salesmen.

And since the volatility adjustment is built-in, it is an apples-to-apples comparison.

 

Japanese PMI Composite

Economic Calendar: The Japanese PMI Composite

 

Japanese Purchasing Managers Index

The Markit Japanese Composite Purchasing Managers Index (Composite PMI) is based on original survey data.  These data are collected from a panel of firms that represent, and are based in, the Japanese manufacturing and service sectors.

The major composite index is composed of two minor indices.  It is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.  These are all based on original survey data collected from a representative panel of over 800 Japanese-based firms that serve Japan’s manufacturing and service sectors. The survey data is collected mid-month.  Survey responses reflect change in the current month compared to the previous month.

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Is The Japanese PMI Composite Important?

Yes!  PMI Data is an important macroeconomic indicator.  Investors need to keep their finger on the pulse of the economy to form expectations of how various types of investments will perform. By tracking economic data such as the PMI numbers, investors will get a better picture of what the economic backdrop is for the various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • Governments like to keep markets inflated because a portion of those corporate profits (and inflated assets) are converted into tax revenue.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly (inflation).

Click this, list of PMI data

Sails Up

↓€/£

Sails are up on this short trade due to global macro and technical confluence.

Global Macro

On the macro side, the COT report shows swap dealers are stretched long the GBP-USD contract and institutional managers are actively taking profit on their euro long positions. Also, the economic calendar lists favorable winds for the big island pound. However, BoE pirate meeting ahead so I will be keeping a weather-eye and trailing stops.

Technicals

The weekly shows good CCI divergence and a pair of tweezer tops on the four-hour chart.  Order triggered on the second pair of tweezer tops.  Lot size is a full bell with a stopper knot set at .9241.

Order triggered at  0.9180

Update:  09/10/2017,  2/3 of trade bulletproofed at 0.9175 & 1/3 of position set to scale-out at 0.9127 –tracking the 4-hour, later trailed to 0.9095.

Update:  09/11/17, closed out 1/3 of position at 0.9095.  Managing remainder of position on the daily chart.

Update:  09/18/17, entire position closed; gain on trade +43% of margin

Antique Maps of the WorldCelestial MapAndres Celariusc 1708
circa 1708

British Retail Sales

How important are British retail sales?

Always check the economic calendar

The British Retail Sales Survey

Retail sales are the total revenue from stores that sell durable and nondurable goods. British retail survey data include all online businesses whose primary function is online retail.  The data also cover internet sales by other British firms, such as supermarkets, department stores and catalog companies.

Headline British retail sales are reported in volume terms but are available in both forms. The data are derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes the 900 largest retailers and a representative panel of smaller businesses, including internet sales.

Collectively, all of these businesses cover approximately 90 percent of the retail industry –in terms of turnover.

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The survey data covers 90% of Brit retail

Why are British Retail Sales important?

Consumer spending is a major component of the economy and market players continually monitor spending patterns. The monthly retail sales report contains sales data in both pounds sterling (£) and volume. British retail sales data exclude automobile sales.

The pattern in consumer spending is often the foremost influence on stock and bond markets.

  • For equity, strong economic growth translates to healthy corporate profits and higher stock prices.
  • For fixed income (bonds), the focus is whether economic growth is stretched overboard and leading to inflation –building a case for interest rate hikes and decreasing the expected value of existing bonds.

The ideal economy walks a fine line between strong growth and excessive (inflationary) growth.

The British Retail Sales survey not only gives you a sense of the big picture on the big island, but also the trends among different types of retailers. Perhaps ground tackle sales are showing exceptional weakness but navigation electronics sales are soaring (have you seen those prices lately?!). Trends derived from retail sales data can help you spot specific investment opportunities and preempt expectations.

British Office of National Statistics

 

Sails Up

↑ £/AUD

Swap dealers are stretched short the AUD.  Great CCI divergence on the daily chart & good on the weekly.  Resistance at 1.62, however wide stop due to Thursday’s GBP economic calendar release.

Update:  order triggered at 1.6210

Position closed, 9/8/2017:  closed at 1.635 due to 15 days of market choppiness, no significant change in retail positioning and the triggering of a correlated €/£ short;  gain on trade +11.8% of required margin.

I will re-evaluate this pair before upcoming BoE meeting.

Update:  £ accelerated a few days after I closed out, I bought on the pullback to 1.65 and held until the RBA assist gov. speech; gain on trade +24.4% of margin.

Learn Cryptocurrency & Blockchain Technology Before You Trade It.

Blockchain 101

Cryptocurrency

Recently, a few Millenials in my family…..and a couple of Baby-Boomers….asked me about cryptocurrency  (Imagine that,  baby-boomers asking Gen-X for advice).  Around a year go,  I told one of my nephews to buy Bitcoin and it is still sitting in his wallet.  I forgot all about it, but he did not.  After staving off the advice of his fellow peers on what he “should” do and keeping his patience, he now wants to learn the market.

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First off, I had to tell everyone that I hold very little crypto (that I bought outright)….and that I do not trade it.  Of course, everyone asked why I don’t trade it.  All traders are gamblers, right?  WRONG.

When I checked  last year, the market showed no structure,  but after a recent glance at the weekly chart, I believe that is changing.  Observing the structure of a market, and forming a reasonable hypothesis about its future, increases the likelihood of a successful trade.

The second reason is this:  I do not really know what it is.  It is called cryptocurrency, but is it really currency?  I cannot pay my car insurance with it,  yesterday at the grocery store I could not buy ice cream with it nor fuel up my car with it.  It is just not generally accepted in the course of usual, everyday business….yet.  And, I know, some will say “well, i bought an xyz with megacoin last week,”  but honestly, if I gave my brother 2 spinners to re-sheet a foresail, does that mean spinners are now currency?

Given all that, and looking at its trading history, I have to agree with those who call crypto a speculative asset (ruled by greed & fear).  

Trading a speculative asset is not an issue when market structure is present,  however I still have to learn the market.  And because of that, I will not be spending my Friday night watching Thrones or Killjoys.  I will be spending it watching this …twice.

Blockchain 101

….and probably twice again.

If you want to make sense of a confusing market, go visit the fine folks who taught me how to read a chart:  Infinite Prosperity, a Corp. Authorised Representative of Alpha Equities & Futures Ltd ABN 76131376415

Sails Up

↓ EUR/$

Good CCI divergence on the charts.  The economic calendar shows good numbers on the GBP.  I expect a DXY pullback.  However the economic calendar lists pirate activity this week so will keep my position size 33% of normal with a wide stop.

Update:  position open, currently below the 1.185 stop-loss

Position stopped out;  risk capped at -7.6% of equity

↓ EUR/NOK

Daily high-test and double top off the 50 ema.  I expect the GBP and USD to apply downward pressure on the Euro.  NOK is a commodity currency.  Position sizing will be halved due to correlation with EUR/$ short.

Update:  position open, currently below the 9.366 stop-loss

Position closed, 08-24-2017:  closed out on 200 ema bounce; gain on trade +23.1% of required margin.

↓AUD/¥

Update:  took a minor short on AUD/JPY at 87.3;  closed position early due to change in retail positioning; gain on trade +15.4% of required margin.

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