BACK AROUND

I’ve had a lot going on lately.  I am considering moving away from the speculative trading side of things and into a different area.  I penned keyed a post announcing my exit of speculative trading altogether last week, but quickly pulled it because in reality I was not sure if that was the case or not.  It was more emotional than anything and I felt it said too much too soon.  In fact it did.  Events have been changing on a day-to-day and hour-by-hour basis around here.  I’ve been continuing to work on my managed accounts, which did not do so hot last month, but still remain positive on the year and have locked in a good month already if they can keep the gains.  I have also been working with a couple of other people on an interesting hard asset management idea, as well as one other possible business that could have potential.  I guess all things have potential, don’t they

I am not exiting speculative trading entirely but I do find myself moving in a direction that is less speculative then previous.

There you have it that is why I have not been around much because I’ve been trying to figure everything out. 

RAISING UPDATE

wdallasm via flikr

I finally had a sort of eventful phone conversation with a third party marketer yesterday. Right off the bat he let me know that my AUM was too insignificant for his firm, but he was rather nice about it.  He said he would hook me up with a seeder fund.  I didn’t really think I needed a seeder fund, but I’m willing to explore all possible avenues.  He used to live in the town we recently moved to, and as it turns out he and I grew up in the same town.  He is 33 years my senior but I think having that connection helped me out a bit.

I don’t know where it will go from here, but it was a good conversation and I can’t ask for any more than that.  From the way he was talking he does much more on the hedge fund and also mutual fund side than the CTA.

I fired up the old brain yesterday and started to work on a new idea for the first time since June or so.  The basic premise is to normalize price in a number of different ways and buy on weakness and sell on strength.  I have been looking at it on a larger number of commodities rather than my normal equity index futures.  I’ve still been working with in sample data so I can’t speak to how I think it may pan out yet, but my gut tells me in the long run it won’t.  Until I can prove that I’ll keep working on it.

Other than that I find myself short the equity market.  I don’t really want to be and my last short didn’t work out so great, but here I am.

Looking forward to my son’s 4^th birthday party today.  He’s going to have his first sleep over.  He was so excited that he got up around 5:45 this morning.  However, this isn’t too abnormal as we can expect to see him in our room anywhere from 5:30 to 6:30 every morning.  Early to bed early to rise…

STILL TRYING…

I wish I could do something in this market.  It is extremely boring.  I know I’ve said that in the recent past, but this is simply ridiculous.  As commodity markets all over are doing quite interesting things I am sitting on my hands, more or less.  I need to expand my world a little bit.

I have continued to work on some ideas for marketing and actually have a couple pieces off to the good ol’ NFA for review.  I believe they have two weeks to go through the items and make their comments.  Then I fix them and resubmit and so the process goes. 

My attorney informed me that my idea for a distribution channel would put me in violation of NFA Bylaw 1101 so I started exploring the option of using a 3^rd party marketer again.  I still have the same opinion on them and they on me it seems.  The two main negatives I’ve heard are lack of educational pedigree and lack of team structure.  It seems most of these guys want to raise assets for a Wharton MBA who has worked on the desk at an IB for a number of years.  I have to wonder if people with this background need capital raising services as they are generally pretty well connected.  Anyhow, I knew I didn’t go that route previously for a reason I just had to remind myself.

I’ll keep working at, but I must be missing something.  I have a decent track record, a respectable background, a solid idea and a good amount of capacity.  I did not attend a great university and have no team in place so I guess the cons out weigh the pros at this point.

Just keep on, that’s about all I can do at this point.  

MY PITCH

cricechen via Flikr

I have been working feverishly on some marketing documents.  Like I said I am bad at this, but now is the time.  I think I have my distribution route set up.  I’ve thought it out quite a bit and I need to talk to the people that manage the money, not the individual investors.  There are plenty of high net worth individual investors that understand these kinds of products, however, they can be difficult to get in contact with.  My goal is to educate the advisors on the benefits of diversification, transparency, liquidity and tax treatment that managed futures offers, specifically my managed futures and then let them do the appropriate contacting.  Why would they want to put money with me?  Simple, because I have a unique product with a good track record that weathered the recent economic collapse as well as the recent economic boom, (well boom according to the people on CNBC who have forgotten about the 40% loss last year). 

In the past I have tried to gain customers by having FCM’s promote me, but as soon as they figure out how low my commission to equity ratio is they walk the other way.  I have yet to find an FCM who prefers quality as opposed to quantity.  I thought that there might be one or two around, but it doesn’t appear that way.  So I am finding independent advisors and seeing if I can get them interested.  I have to admit the presentation, thus far is pretty compelling.  Of course that comment is to be taken with a grain of salt as I may have some level of bias.

Anyhow, I have been getting a nice presentation put together so that I can send it to the NFA and have them tell me how to make it not so nice anymore.  I have found that the NFA has an irrational fear of graphs.  They believe that investors can be easily deceived with the use of graphs.  This causes the employees of the NFA to develop a rare condition known as schemaphobia.  Yes I have discovered a new disease and named it after the word schema, which is in my Microsoft Word thesaurus.  Unfortunately there is no cure for schemaphobia and the outlook remains grim.

This along with a number of trips out of town and household projects has kept me quite busy and unable to maintain a normal routine.  I do get my door in a couple of weeks.  I am very much looking forward to that.

As far as the presentation goes, I am waiting for my September numbers to be finalized, then I’m sending the presentation off to the NFA.  I am hoping that by mid November I might have something.  Just in time for Christmas, the worst possible time to try to sell an investment.  No point in waiting if you ask me.  I’ll keep you updated if you are interested. 

CHAIR RAILS & MARKET RISK

I was reminded of an important market and life lesson this weekend.

I finally got around to hanging our TV in the family room.  I had planned on hiring someone to do this, but couldn’t seem to find any motivated labor in this area.  I finally went at it myself.  I was fortunate to have the help of my father-in-law so lifting the TV was not such a difficult task.

I started by putting the outline of the wall brace onto the wall.  I got my stud finder out and made sure I had a good location on the studs.  I then got my level out and made sure that all my holes were nice and even so I wouldn’t have a crooked TV.  Nothing worse than hanging a TV only to have to re-hang it.

I got my drill out and drilled the appropriate amount of holes in the studs.  Then I put the wall mount onto the wall.  Before screwing it in I put my level onto the mount to make sure it was in fact level.  Everything was looking great.  I screwed in the upper right left screw then match the mount up with the lower right screw and put the level up yet again to make sure everything was still going smoothly.  It was!  I screwed in the lower right screw and once more pulled out my level.  You never can be too careful, you know.  So by now I’ve made sure this thing is level at least five different times.  I’m a big fan of, “dotting my i’s and crossing my t’s.”  I quickly put in the other two screws and of course put the level on mount one last time.  At this point I am getting worried that I may have OCD.

Now I screw the hanging mechanisms onto the back of the TV.  I make sure the two individual hanging arms are even.  Then my father-in-law and I lift the TV onto wall mount.  We are careful to make sure that the hooks make it over the wall mount and we let go of the TV.  It’s finally up and it hasn’t fallen off the wall.  I’m excited; I’ve never hung a TV this large before.  I am sure you can guess what I did at this point.  Yep, I grabbed the level and placed it on top of the TV.  IT’S LEVEL!

I clean up my mess and take a few steps back to admire my handy work.  Much to my horror the TV appears to be hanging low on the left side.  This cannot be.  I checked everything to the point that I thought I was being too cautious.  What is going on?  I grab the level and put it on the TV, it says it’s level.  I double-check the hanging arms on the back to make sure they are even and they are.  Directly below the TV is a chair rail.  I start thinking, “Oh no, if the problem is what I think it is I am going to have a hard time fixing it.”  I slowly bring my level down to the chair rail.  I don’t want to look, but I have too.  Sure enough, the chair rail is at a slight angle that isn’t really noticeable with the naked eye.  Now I am excited and mad at the same time.  My handy work was great, but the builders handy work was not so great. 

My solution?  Hang my TV crooked. 

So what market lesson was I reminded of?  Regardless of how much you have planned for something it is always possible there is another variable that you didn’t think about.  The chair rail was in plain sight so that should have been a known, but everyday in the markets there are unknowns that we must somehow protect against and this fact underlies the importance of risk management beyond simple stop loss orders.  Things you may not know, but can be prepared for are internet outage, computer failure, bad ticks (my favorite) and even any adverse news event.

Bottom line, always make sure your chair rail is straight. 

WINDY CITY

fotopusch via Flikr

Well I am going to get some questions answered.  I’ll be in the Windy City tomorrow by 8:20am.  Never want to be in the air when a position is on.  I’m looking forward to my meeting with a couple of guys I used to do some business with.  I know these guys to be pretty straightforward so I know they will give me some clear answers to my questions.  Once I have those answers I will know if I can proceed with my little idea or if it is just a pipe dream.  Normally I am able to tell pretty quickly if my ideas are bunk or not just by sitting down and coding them up.  I’m afraid this one falls out of the realm of coding, at least for now, that’s why I need their advice. 

I’ve been working on some new marketing material for my fund also.  Marketing and selling myself has been a real weak point of mine, but in the end it has to be done in order to grow.  So I am going to stop using the excuse that I am bad at it and just go be bad at it.  I can only get better. 

Nothing else is too new.  I’ve put the stat arb ideas I was working on, on hold for the time being as nothing was really panning out in that area.  I’m continuing to explore a couple of my market making ideas.

…GNITSET KCAB

I have to admit it.  I am a back tester.  As a matter of fact I am a back testing fool.  I spend a large portion of my days back testing ideas, but I hate back testing.  I don’t trust back testing.  Back testing can be a very, very misleading practice and that is true most of the time.  So if I dislike back testing why do I do it so much?  Simply because when it comes to modeling speculative ideas the only thing I’ve got to go on is how it looks in the past.

Here are the reasons I think back testing can be and is often so destructive:

1). Curve fitting to the entire possible data set

2). Data snooping

3). Unrealistic cost assumptions

4). Pure chance

I have written in blogs past how I try to stay away from some of the back testing scenarios that cause poor real time performance, but there is one that is near impossible to detect and that is the role of chance.  It is entirely possible to see an idea work on in sample as well as out of sample data just by pure chance.  There are ways such as Monte Carlo simulations that are supposed to help determine the true risk of ruin, but when it comes down to it chance plays a role in all speculative trading, modeled or not.  I am sure I will receive some flack for this comment, but I have been taught this time and time again both in modeling and in actual trading.

I have seen chance more times that I can remember in the back testing process.  An idea is written on a given data set and continues to perform on an out of sample data set but as you continue to walk that out of sample set forward you start to see loser after loser and pretty soon the entire model has broken down.  Now these models are developed in the same rigorous way that all the other models are developed.  The idea is as logical as ones currently in production and not based on indicators or technical studies.  It is safe to say that the in sample portion is pretty much curve fit, but why did it work on two years of out of sample data and then break down?  To me the only answer is simply because of chance.  This is one reason it is advisable to have a large set of out of sample data.

Back testing is a weapon of mass destruction to the individual investors account.  Too much weight is put on back tests and performance that never really happened.  Be careful out there.  

SOON TO BE…

dustrabbit via flikr

Well that was some nice volatility we saw in the morning.  Of course by afternoon it dried up, but then got going again at the very end of the day (not that you needed the play by play).  It will be interesting to see what September brings to the equity market.  People in the financial media love to hype September as the worst month for the market, which over time may be true, but what they fail to mention is the caveat that past returns are no indication of future results.  I have no idea what September will bring, but all I can do is hope that it brings more volatility than the past few months. 

People who trade, especially intraday, generally need market volatility in order to be profitable.  Whether you’re trading mean reversion or momentum the moves have to be there in some form or another.  Of course you could always just lever up if the moves aren’t available, but that causes a trader to be more susceptible to adverse price movements.  Leverage is not a trader’s friend.  Not for long anyway.  Forex dealers seem to lure people in with the amount of leverage they can offer, but the truth is in most cases that leverage is going to hurt more than anything.  Trading on leverage, even a small amount, is absolutely playing with fire.  Even if you know what you are doing you will eventually get burned. 

Chances are I will not be around much more this week.  We are taking a small trip and I plan to spend the majority of the last part of it in the water.  It will be wonderful to get to surf again at one of my favorite breaks for the first time in a long time.  Certainly I will remain connected with the markets some how or another, but I am going to do my best to not get too involved.

WATCHING PAINT DRY

cooliceblue via flikr

Hmmm… what can you say about this market?  It’s as about as boring as it gets.  I don’t even remember the summer of 2004 being quite this boring at least in the equity market.  I’m sure that it was and I’m just not remembering. 

The environment has caused me to explore some other ideas that are always in the back of my mind.  I’ve continued work on the stat arb stuff, although it appears that it is going nowhere fast, it is still an interesting brain exercise.  I’ve also been throwing around some market making ideas for some of the electronic products.  There was a period of time where I made markets on mini crude oil, not as an official market maker, but I got filled enough to avoid their message limits.  The software solution that I was using turned out to be pretty bad so I let it go to pursue more speculative things.  Supposedly the provider for the software is rather well known and according to them highly regarded, but they were not the solution I needed in the end.  I found their server architecture to be rather cumbersome, and this caused a lag in canceling and replacing orders, but again according to them it was the best in the biz. 

Anyhow, I have been contemplating some other ideas for quite some time and although it appears that the markets risk appetite has been increasing I find mine has been decreasing so I figure there is no time like the present.  While I’m certain these ideas are already in play I’d be interested to see if there was room at the table for a small player.  I’m going to be pursuing it more aggressively after our short trip next week.

In the mean time I’ll watch the paint peel because according to the photographer of this picture it is more exciting than watching paint dry.

THE NEW OFFICE

 

Thought I’d just throw up a couple pictures of the new office*.  I know some friends and family are interested to see how it’s turning out.  My camera wasn’t able to get a good shot of the entire office so that’s all you get for the moment.  I still need a door, but recently found out that Home Depot will do it cheaper than any of the contractors I’ve spoken with.  I think I’ll go that route, but it’s still going to take 4-6 weeks to get everything made.  Beyond that I need to get a drywall guy out, as I can’t fish the wires for the TV through the wall because it’s a blown insulated wall.    

I’ve been doing some interesting research on some stat arb ideas.  Nothing worth mentioning specifically, but there is some interesting stuff there.  Whether or not anything will pan out is TBD, but it’s fun nonetheless and something I’ve never explored in detail before.  I can’t help but think that most of the good ideas are probably pretty crowded already, but who knows.

*Note: Desk is only this clean for the picture.  It’s normally pretty cluttered with stuff