Cancelled my Income Protection Insurance

Unisuper are raising the cost of income protection insurance by 43%. I can't see why I am paying for this insurance any more, and, so, I cancelled it. That's AUD 2,400 more a year that will be going into my superannuation account. I kept the death and disablement insurance as it costs much less, though I'm not 100% sure that I should be paying for that either. The death insurance pays out AUD 1/4 million and costs about AUD 50 a month.

May 2019 Report

In May the Australian Dollar fell from USD 0.7047 to USD 0.6930. The MSCI World Index fell 5.85% and the S&P 500 6.35%. The ASX 200 rose 1.96%. All these are total returns including dividends. We gained 0.37% in Australian Dollar terms and lost 1.30% in US Dollar terms. Our currency neutral rate of return was -0.53%. I estimate that the target portfolio gained 0.01% in Australian Dollar terms and the HFRI hedge fund index lost 1.75% in US Dollar terms. So, we under-performed the Australian stock market but outperformed our other benchmarks.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also include the Australian Dollars return from foreign currency movements, other net investment gains and losses - net interest and fees, and futures trading. At the asset class level, private equity was the best performing asset class gaining 1.56%. The worst asset class was rest of the world stocks.

Things that worked very well this month:

• Trading Bitcoin. The beginning of the month we made big profits and then towards the end of the month started losing.
• Medibank Private. We sold out of it in the post-election rally.
• Oceania Capital. They announced a buyback at a premium to the last share price prior to planned delisting. See below...
• Hearts and Minds. Continued to outperform the markets.
• Our corporate bond portfolio began to have net positive returns.

What really didn't work:

• Bluesky Alternatives. The parent company of the fund manager went bankrupt... See below...
• China Fund. Got hit by the trade war.

Trading income was USD 4,436 for the month. The rate of return on cash in trading accounts was 3.15%. We made a lot of money in Bitcoin and a little in ASX200 futures and lost in crude oil, gold, NASDAQ 100, and palladium. We were up much more in the middle of the month before a drawdown in Bitcoin. Though this month we didn't make as much as in May 2018, we are overall tracking slightly higher so far this year than in 2018, which is informally my goal for this year.

We moved further away from our new long-run asset allocation * as we continued to accumulate bonds. But this is probably "peak bonds" in terms of their share in our portfolio, as we have finished moving money from my US bank account to Interactive Brokers:

Buying Australian Dollars is also on hold for a while as we bought a lot last month.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• USD 50k of corporate bonds matured (General Motors)  and I bought USD 147k of USD bonds (Tenet Health, Anglogold, Deutsche Bank, and Yum Brands).
• We traded successfully, as discussed above.
• We sold 3521 Medibank Private shares when the price spiked after the election. We now have no individual company stocks.
• I bought 25,000 BAF.AX shares following the manager BLA.AX being put into administration. The board of the LIC is trying to engage Wilson Asset Management as the new manager and I think the chances of that are now better. The discount to NAV is about 36%, so even if assets managed by BLA are liquidated, I think there is a margin of safety.
• I bought 8000 OCP.AX shares after the manager announced that they would delist and buy out minority shareholders. The announced buy out price of AUD 2.30 is much less than NAV of AUD 2.83 though higher than NTA of 1.50. So, I am still hoping that they will raise the buyout price. On the other hand, the largest shareholder owns 60% of the shares and so it seems that they can do anything they like. Only around 25% are held by non-insiders/managers. Even if they don't raise the price, it is about a 12% p.a. rate of return from my entry price to redemption.
• I bought 2000 shares of the IAU gold ETF. 
• We applied for the Regal Funds IPO.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.

Asset Allocation at "Peak Bonds"

At this point we have probably finished expanding our allocation to bonds and from here the share will fall again. So, I thought it would be interesting to post a snapshot of our asset allocation here to contrast with in later posts. All the blue segments in this pie chart are equity related including the allocations to private equity and hedge funds, though only the first four are allocated to listed long-only stocks. For the first time I have split the commodities category into actual gold and futures which includes managed futures and the cash used in our own trading. Cash is money in our regular bank accounts.

We don't include our house in the breakdown and there are also debts, particularly a margin loan and our mortgage. This is just the assets side of the picture.

Weekend Trading

Bitcoin is again rising over this weekend, so far. I set a stop buy order in my CFD trading account, which allows me to trade Bitcoin 24/7 for 7700 and it has triggered. Bitcoin is around 8000 at the moment. This long position hedges my short futures position. It allows me to have a stop on my position over the weekend when the futures market is closed. I would have been better off and less anxious if instead I had closed the futures position at the close of trading on Saturday morning Australian time. I think that is what I will do in future.

Monday's Move in Bitcoin was a Huge Outlier

The weekend move in Bitcoin extended into Monday's trading and Bitcoin ended up rising 25%. You can see how much of an outlier that was on my daily trading return vs. volatility graph:

Since then, Bitcoin has gone into another consolidation range. This morning it looked like we might get stopped out of the long trade at the open, but the market bounced and we are still long from 5285.

P.S. 12:55pm

We just closed the long position and went short at 7715. Profit on the trade was USD 12.1k Of course, all this was done automatically via stop orders. 20 minutes later the short is up USD 5k. This is crazy price action.

Bitcoin Going Completely Nuts Over the Weekend

I've noticed that in recent days Bitcoin has gone up starting at around 6pm US Eastern time when all stock markets in the World apart from New Zealand are closed. Of course, this is the afternoon and evening on the US West Coast. So, I figured that it was driven by retail investors in the U.S. Now this weekend, that trend has continued in dramatic fashion:

Bitcoin is up almost $700 on Friday's close. Luckily, I am long Bitcoin futures. It certainly makes me wary of ever being short Bitcoin over the weekend. Bitcoin has now popped up to be my 22nd best investment in dollar terms ever - I've been investing since 1996... Just about to overtake Pendal Property Investments. Anyway, anything could happen by 10am Monday Eastern Australia time when the futures market re-opens...

P.S.
Obvious solution to going short over the weekend is to have an account with a cash Bitcoin exchange that is open over the weekend and buy Bitcoin if the stop loss level is reached. What such exchanges allow stop orders?

P.P.S.
Bitcoin now up $1000 since Friday. If this persists till Monday it will be the biggest daily move in percentage terms in my dataset, possibly since the futures market open at the end of 2017. Plus 500 allows CFD trading 24/7. There are huge buy-sell spreads, so this would only be used as insurance. You can place conditional orders, such as buy only when the price reaches a certain level.

P.P.P.S.
I tried the demo platforms at Plus500 and eToro. eToro appears to be very limited and geared to novice traders. There were strong restrictions on the levels of orders that could be placed. So, Plus 500 seems to be the only real option that offers Bitcoin CFD trading 24/7.

More Asymmetry

A couple of days ago I posted about the asymmetry of market returns capture by the target portfolio. The portfolio captured less than 100% of the upside in the markets but almost none of the downside. The chart below, inspired by a recent paper from AQR, shows the Bitcoin trading model's daily returns compared to the absolute percentage change in the price of Bitcoin futures for that day:

The rising diagonal line are all the days when the model was properly aligned with market direction. The descending diagonal line are all the days where it was incorrectly aligned with market direction. The remaining cloud of points is where the model changed direction. Some of those days were winners and some very bad losers when the model ended up incorrectly with the market in both directions that day. For example, it was stopped out of a long position and entered a short and then the market rose for the rest of the day...

The fitted quadratic curve shows that for low absolute price changes up or down in the price of Bitcoin, the model tends to lose money. This is because of "whipsaw". There is a strong asymmetry in the response for large moves and so the fitted curve shows that the model captures increasingly more of the return the larger the move.

The results do conform to AQR's argument that returns to trend-following have been poor recently because markets haven't been moving enough.

Varying Position Size Still Doesn't Make Sense

Last year, I posted that increasing trading position size when volatility is lower didn't make sense for my trading system. When the volatility was low trades tended to lose more and win less. So, trading bigger because risk was supposedly lower didn't pay off.

Now I am using a more traditional trading system that wins by letting winners run and cutting losses short, without pretending to predict the direction of the market. Here, I have found that there is no correlation between the profit from trades and the maximum loss possible given the initial stop loss:

The chart shows all the trades in Bitcoin futures my system would have made in the last year The x-axis shows the maximum loss on the trade of one contract (assuming we can exit at the stop loss, i.e. no Black Swans). The y-axis shows the profit for the trade. There is a slightly positive correlation, though it is not statistically significant. On the other hand, you can see that realized losses do increase with increased initial risk. The system won 46% of the time with the average win 4.1 times bigger than the average loss. The average trade lasted 5 days.

If you adjust position size so that the initial risk of each trade is the same, returns do increase, but so does the maximum drawdown. If you scale back the average size of trades so that the maximum drawdown in percentage terms is the same as for trading with the same number of contracts each time, then returns turn out to be very similar for both strategies.

Bottom line is that varying position size increases returns but also drawdowns by a similar amount. If you care about drawdowns it doesn't help. So, I think I will focus on controlling drawdowns when choosing position size rather than equalizing initial risk.

Target Portfolio vs. the MSCI World Index

The graph shows monthly returns for the target portfolio vs. the MSCI World Index in Australian Dollar terms. The linear fit shows a beta of about 0.3 – if the market rises 1% more , the portfolio tends to rise 0.3%. Alpha is at around 8% per year. The orange line is a quadratic fit. This suggests that beta increases, the more the market rises, while for large down moves beta is zero. This is the kind of asymmetric relationship you want to get.

Margin Requirements for Bitcoin Futures Trading

I just discovered that while going long a Bitcoin futures contract requires margin of about USD 16843.75 per contract, going short requires initial margin of USD 200k at Interactive Brokers. Do they really think that Bitcoin could rise by a factor of 7-8x when the market is closed?* This makes it much harder for people to go short and contributes to the inefficiency of this market. Importantly there are no options on these futures, so you can't hedge against large adverse movements. I can't see anything about this asymmetry in margin on the CME site, so I assume that it is set by the broker.

* Stops will only work when the market is open. The Globex futures market is open 23/5 - closed one hour each day and over the weekend.

April 2019 Report

In April the Australian Dollar fell from USD 0.7096 to USD 0.7047. The MSCI World Index rose 3.18% and the S&P 500 3.72%. The ASX 200 rose 3.36%. All these are total returns including dividends. We gained 0.95% in Australian Dollar terms and 0.26% in US Dollar terms. Our currency neutral rate of return was 0.91%. The target portfolio gained 2.37% in Australian Dollar terms and the HFRI hedge fund index 1.57% in US Dollar terms. So, we under-performed our benchmarks.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also include the Australian Dollars return from foreign currency movements, other net investment gains and losses - net interest and fees, and trading Bitcoin futures. Trading income was USD 733 for the month, which at an annualized rate was roughly a 7.3% rate of return on capital.  At the asset class level, only real estate lost money this month. Australian small cap stocks were the best performing asset class.

Things that worked very well this month:

• 3i, the UK private equity firm, and Generation Global shined. A few other funds beat the index. Tribeca bounced back from underperformance.

What really didn't work:

• Cadence and Bluesky sucked. Cadence went ex dividend and I couldn't be bothered to account for this properly in my accounts, so it will do better next month when I receive the dividend. However, it fell by more than the dividend and falling in an up-market is not good. I'm still willing to give them the benefit of the doubt that they will come back again. Bluesky was probably affected by troubles at the manager, also known as Bluesky, and lack of certainty about Wilson Asset Management taking over as the new manager. 
• I continue to be impressed by PSS(AP), where we are now in the balanced fund.

We moved away from our new long-run asset allocation * as we continued to accumulate bonds:

The main driver is continued movement of cash from my US bank account to Interactive Brokers where I am buying bonds before eventually transferring some of the money to our Australian bank accounts when the broker allows..... At the end of the month we bought 1/4 million Australian Dollars by transferring money from Falafeland. This means that we will buy new US bonds for a few months as the current ones mature rather than changing the proceeds into AUD immediately as the plan is to buy about AUD 50k per month. After the month end, I immediately made an AUD 90k non-concessional (after tax) contribution to superannuation. As I plan to roll over my retail super fund into a self-managed super fund after the start of the new financial year in July, I invested the money in the CFS Wholesale Conservative Fund.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• USD 69k of corporate bonds matured (Royal Bank of Canada)  or were called (Goldman Sachs) and I bought USD 275k of USD bonds (Tokio Marine, Anglogold, General Motors, CNO, Scorpio Tankers, Woolworths, Safeway, and Hertz). There is still more than USD 100k to convert into bonds. I also bought 245 more shares (net) of CBAPH - Commonwealth Bank hybrid securities.
• I did some unsuccessful trading of gold futures and then bought 1000 more (net) shares of IAU - a gold ETF.
• I did some successful trading of Bitcoin futures.
• I sold my remaining shares in PIXX.AX and bought a small amount of OCP.AX at $1.98 a share.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.