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Archive for February 2011

Trading forex on fundamental data

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Is it possible to trade on fundamental data? Some are highly sceptical about it, call it funny-mentals … The key problem seem to be timing the entry and measuring stoploss levels. Fundamentals may tell that the financial instrument is ¨cheap¨ or ¨undervalued¨, but it tells nothing about entry points. The fact that something is cheap doesn´t mean that it can´t get even cheaper. If somebody buys something based on fundamental analysis and the price goes down, the lower price makes the buy argument stronger while the account carries unrealised loss.

Common wisdom tells that trading forex on fundamental data is almost impossible. Too many factors at play, some of those hardly measurable – the noise is likely to be too overwhelming and the probability of mistake so high that any findings are rendered useless.

Nevertherless, we find one simple fundamental model fairly reliable predictor of exchange rate. The model analyses the interaction of several fundamental factors such as GDP growth, inflation, money supply to project exchange rate direction. The rationale is that, although the exchange rates may divert from the fundaments to a great extent, sooner or later the exchange rates will correct to reflect the fundaments of the underlying economies.

This particular fundamental model has been noticably precise. It needs some non-fundamental, technical input to identify entries and exits, but it is a great tool to improve the odds of long-term trend-following trade being profitable.

Attached here is a reseach summary back in Y2008 calling for ¨doomed GBP¨. The chatter was positive for the cable at the time and there was little to suggest a sharp downtrend in GBP. The rest is history.

Empirical evidence suggests that this fundamental analysis model can be applied to predict long-term currency moves. Yet, conventional technical analysis is required to identify entry and exit price levels.


Written by A.S.

February 23, 2011 at 8:36 pm

Zweig 4 Percent Model: Full Backtest Results

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The results are available here.

Written by A.S.

February 14, 2011 at 10:57 pm

Turtle Trading Rules: Full Backtest Results

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Comprehensive turtle trading system backtest results are available here.

Market by market with several publicised modifications, but general conclusion is:  fantastic returns some time in the last quarter of the previous century, but good performance of the turtle systems is a phenomena of the past rather than present.

Paulson & Co, High returns and UCITS

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It´s been in the news that Paulson & Co has launched a UCITS III fund eligible for distribution to retail customers in European Economic Area. Due to regulatory issues, retail investors usually have no access to high return (i.e. presumably complex and risky) investment vehicles. Instead retail investors are targets for banks and other promoters who sell them all kinds of regulated funds. Those funds are typically poor performers and the management is more concerned how to gather and keep as much as possible assets rather than how to generate decent return. Just list through their fund marketing brochures and you´re likely to find a lot of low single digit or negative returns. Occasional 10+% return is usually for single sector or country funds and due to cyclical upswing in the underlying asset values rather than alpha return generated by the managers.

Paulson & Co managed fund is something different from a typical retail fund, there is top-notch, performance-driven management in place, but the strategies are unlikely even remotely to be adapted to fit UCITS requirements. Last year we´ve been asked by a customer to evaluate a feasibility of launching UCITS-compliant hedge fund. The conclusion was that, generally, hedge funds do no qualify for UCITS recognition. UCITS regulation is too restrictive to the point that would render most of the hedge fund strategies irrelevant. Borrowing restrictions (max 100% of fund´s assets), asset class restrictions (no real estate, commodities, precious metals …) etc. are aimed to fool-proof the operation. Therefore, it catched my interest how they could fit the fund under UCITS regulations and how the fund strategy would differ from the original strategy.

So, how they have done it? The fund is launched as a sub-fund of DB Platinum IV fund. There are 47 sub-funds in DB Platinum IV fund, the Prospectus spans 476 pages, of those 34 devoted specifically to DB Platinum IV Paulson Global. The small print advises that the investors should be prepared and able to sustain losses up to a total loss. The fund´s underlying asset is synthetic managed basket. The fund is a fine piece of financial engineering. The basket is a virtual portfolio, as the Prospectus states, the allocation of the investment will be made solely on a virtual basis in the records of the Basket Administrator.

The way Paulson & Co has launched UCITS fund is not a suitable way for the most of hedge funds. The fund holds notional basket of investments. To keep it notional the fund requires a lot of fiddling with swap and similar contracts with no other purpose than to keep the fund UCITS compliant.

Written by A.S.

February 10, 2011 at 3:36 pm

Posted in investment

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Outsided Returns by A2ML

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You won´t find A2ML in mainstream press, or on and they are not a household name to a typical investor. Yet the returns of their Megalio Vision Fund are outstanding. 287% in 23 months, to be more exact. And it seems the Megalio Vision Fund is not even a fund, but rather a managed account although the manager is FSA regulated and the investment vehicle has both custodian and auditor.

A2ML is an example of investment opportunities we´re looking for in preparation for our fund launch.

Written by A.S.

February 4, 2011 at 6:37 pm

Posted in Uncategorized

Proprietary Companies in System Trading

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The fund to invest in system trading is not available yet (we are working to set up one later this year) and a DIY solution is too labor intensive to be practical.  A go-between is a proprietary trading company.

In many aspects proprietary trading company works as a fund. It pools investments from several investors and is managed pretty much the same way as any investment fund. However, it usually lacks custodian and corporate side of it gets managed more like an ordinary business company.

The advantages of proprietary trading company are apparent cost-effectiveness as compared to a fund structure while ensuring professional management.

Any established jurisdiction is suitable for incorporation of a proprietary trading company although registering the company offshore has the advantage of zero tax rate and low maintenance cost.  Malta, Jersey, Gibraltar, Singapore, Cayman Islands, BVI, U.S. Delaware are just a few to mention suitable domiciles for proprietary trading companies.

The cost of incorporation usually does not exceed USD 5000-10000 (compared to at least USD 50´000 for a fund launch). As well, the annual maintenance cost for a regulated fund may be as high as EUR 300´000. Proprietary trading company can achieve, effectively, the same goals at at fraction of cost (usually not exceeding EUR 25´000 per annum).

The procedure to launch the proprietary trading company is straightforward:

  1. Preparation of Private Placement Offering and incorporation documents.
  2. Incorportation of the Company.
  3. Opening of bank accounts.
  4. Opening of brokerage accounts.
  5. Start of operation.

The whole procedure may take take as little as a couple of weeks.

Written by A.S.

February 1, 2011 at 3:21 pm

Posted in Uncategorized