Tuesday, April 24, 2018

Sophisticated Investor

I got an e-mail about an Australian venture capital fund and decided to follow it up. The information the fund sent me looked very interesting, but it is limited to wholesale and sophisticated investors. In order to be classified as a wholesale investor you must have individually (not with your spouse) AUD 2.5 million in net assets or AUD 250k in gross income. I don't qualify individually on this basis, though we jointly would qualify on the second criterion and in the near future I will qualify on the first criterion. So, I told the fund salesperson that and they sent me a questionaire to see if I qualify as a sophisticated investor who understands the risks involved. I just sent the form back. If they qualify me I will invest in the fund and disclose more information here. Overall, I plan to invest 5% in private equity and it makes sense to allocate half of that to venture capital and half to buyout etc. IPE and OCP cover the later stage private equity in the portfolio 2.5% roughly equals the fund's minimum investment requirement, so that is what I will invest, if approved. Interestingly, early stage venture capital investments are tax free in Australia. That also means, of course, that you can't claim losses against your income tax.

In other news, I redesigned a trading algorithm from the bottom up on 2018 data, using the same forecasting model. It has a bit lower return and larger drawdowns, but all the rules make theoretical sense and it sticks to the model predictions rather than reversing direction if stopped out. In fact, it only uses a stop when initiating a new direction - this is to guard against the new signal being noise - the stop is removed after the direction is confirmed. After that I would just use hedges. Next, I need to backtest it for 2017 and 2007. I think 2007 is analogous to 2018, while 2017 is very different - a constantly uptrending market.

The model is currently short, but I am not trading it without backtesting and also there is higher risk entering a move already underway, as the model is unlikely to time the exact optimal turning point to reverse direction.

P.S. 25 April
I backtested the model for the second half of 2017. Results are not as good as year to date in 2018 but they are much better than the model I was using at that time when the fake stops are removed from the model. The main issue is that my model tends to underperform the market in strongly trending markets as it keeps looking for opportunities to go short. We can compensate for this by trading 2/3 the model and 1/3 just long the index. This means that when we go long we use 3 times the position we use when we go shorter. This results in a more consistently rising equity curve. Increasing position size when going in the direction of the established trend definitely makes sense.

P.S. 27 April
They accepted me as a sophisticated investor.

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