Friday, August 18, 2006

Freestyle Management and Black Box Trading

There are actively managed mutual funds and then there are "freestyle managers". A subclass of hedge funds use systematic trading of futures with decisions being generated by "black box systems". One of the biggest is Man Financial. I have been interested in the past in investing with them, but either I didn't have the minimum amount at the time or more recently couldn't apply to their Australian offering as I am not resident in Australia and the US sales representive never responded to my contact... My investment strategy is now a combination of a black box trading system for short-term trades and very freestyle management of longer term investments largely "outsourced" to other investment managers.


InLibrisLibertas said...

So did you make the black box system or is it someone else's?

mOOm said...

No it's my system. Well it's not totally black box. I have a couple of models I have developed as well as using some of the publicly available stuff that I've found to be useful. I discuss a bit about it in the blog.

Last night I got a sell signal, but today the same model negated the sell signal... the other model which is more analogue and less black box seems to be suggesting a sell.... I also looked at a lot of the standard stuff and decided the risk isn't too high to holding my position. But this is an unclear juncture now.

Clifford said...

Quick question: I recently fired up my Ameritrade account and within the next month, plan to purchase some stocks. Someone suggested I wait until after October because stocks typically dip during this month. If you were in my shoes, would you wait? Or move in?

mOOm said...

I'm thinking that the stock market will mostly decline into October. See the chart in my August 13th post. Of course I could be wrong. I'm not betting everything on that happening.

One thing to consider is that if you are just starting out and the market goes down you lose relatively little money if you are adding money continuously to the market and so it isn't worth really trying to time the market with your first few thousand dollars. However, for someone with a larger amount to invest or already invested in gets more important.

As I see it you have three options I would consider, from least aggressive to most aggressive:

1. If you have a fixed amount to invest divide it up say into six portions and invest a portion each month for the next six months. Or if you are just making small contributions from salary then don't worry just put in a bit each month. This is called dollar cost averaging. You buy more shares when the price is lower and less when it is higher.

2. Keep it in a money market account or bond fund until October/November.

3. Try to benefit from a fall in the market by using one of the new ETF's recommended by Suze Orman in this article on the second page. These funds will rise in value if the market falls but lose if it rises. This is the kind of thing I do with options and shorting but more straightforward for beginning investors. Downside is any gain you make is taxed as a short-term gain unless in an IRA as you will want to sell the shares in October-November.

Hope this helps and happy to follow up.

Anonymous said...

Hi Moomin...I have been very much intrigued and intrested, to say the least, about black box trading.

I have a friend who is involved in black box trading and has claimed of consistent monthly returns avg. 100%...can this be real???

Nevertheless, it has certainly caught my attention and as such I am determined in building a trading station. Having said this, I dont know where to start and how to start...

Can you help with your insight?


mOOm said...

Certainly that kind of return sounds very unlikely to actually be consistent. One way to get very high returns is to lever up a much lower yielding model using options or futures. If the margin required on stock index trading is 7% say you can easily lever up 10x. And it might work for a while. A 10% unexpected shock though will completely wipe out your account. Even 10% per month is equivalent to 213% per annum. My model is showing an alpha of about 140% over the two months I have actively been trading it. So 10% per month unlevered is still very high.

This is an example of a guy trading with publicly documented trades using a black-box type technical trading system:

This model is very good for a publicly exposed model but gets returns nowhere near those kind of levels.

Both his model and mine don't use any traditional TA indicators. Don't expect to do as well with publicly available indicators however you play with them. Good use of publicly available TA can I think beat the market just because only a minority is using it. But the returns won't be spectacular.

I don't use tradestation. I am using Excel and an econometrics package. I think GZ is using a custom program that someone wrote for him based on his concept. So bottom line is you need some concept first and then it is secondary I think to find some software that can program it. My concept is based on a mixture of traditional TA, my knowledge of time series analysis, and a lot of experience of what works and what doesn't work in TA and trying out many different earlier concepts and back-testing using statistical analysis and trading simulations (in Excel).