July 6, 2019

Here is another follow-up post on Quantopian dealing with the same trading strategy as discussed before.

I stated previously in A Cloud & AI Strategy thread, that if you wanted more you could add a little bit more leverage, and since the leveraging is compounding, it would have a direct impact on the overall performance. Evidently, it would also have an impact on the portfolio metrics. 

I do not like to make such statements and then not show that, in fact, it is what the program would do. The following should be compared to the 264,842% scenario presented in my previous to last post in the cited thread:

10M Scenario

(click to enlarge)

By simply presenting something like this you hit what I would call the credibility factor. Can this really be done? To which I have to answer: yes. The program has the same architecture as Stefan's originally presented program. What I added to his “template” are my own reengineered long-term trading functions, procedures, and protection measures in order to allow the strategy to trade more and expand its average profit margins.

I dealt with the whole payoff matrix as a block from start to finish and not just over its original moving lookback period. Giving the strategy a long-term outlook of things.

It is not the first time I take a published trading strategy and literally make it fly. Sure, there is the use of leveraging which should be considered, in certain scenarios, as a double-edged sword. It works fine if your strategy has a high enough positive return to cover the added costs associated with the leveraging. Saying that the added return has to more than compensate for the added cost of leveraging. Otherwise, you are shooting yourself in the foot, almost by definition.

Here are the portfolio metrics with the added leverage:


(click to enlarge)

The max drawdown increased from -31.4% to -33.7% which occurred mostly during the financial crisis and its immediate aftermath and where the actual average market drawdown during the financial crisis exceeded -50%. For the added “pain” (-2.3% added drawdown), the portfolio generated some $3.8B more.


(click to enlarge)

The smallest positive return occurred in 2008 during the financial crisis where short positions were taken as a protective measure instead of riding it out or hedging positions. Note that all years had positive returns, with a remarkable positive push in the 2009 recovery.

To increase performance did not require that much of an effort. Gross leveraging went from an average of 1.62 to 1.63. And all the while, the overall strategy's stability remained at 1.00. It required accepting a higher volatility measure which went from 30.7% to 30.9%. Remarkably, the beta slightly improved going on average from 0.53 to 0.52. Moves not significant enough not to attribute them to the randomness of the draw and portfolio variance.

The portfolio statistics generated:


(click to enlarge)

The increase in CAGR terms is not that much either. However, this is compounding and the impact over time can be considerable. The why one should have a long-term vision in the development of his/her trading strategy. The CAGR came in at 70.5% compared to 68.9%. A difference of 1.6% return-wise and it produced $3.8B more.

The strategy can be pushed even further. I've tried it and it does. However, this is where the credibility factor comes back in. Already, performance is at such a level that few would even consider that it is possible to achieve such results when, in fact, with the change in perspective, it is relatively easy. But then, we all have to make choices.

Created. July 6, 2019, © Guy R. Fleury. All rights reserved.