June 2018 Report

This month was the third month of the futures trading experiment. The first month was the model development phase, while last month was about ironing out the glitches and training myself to trade the model properly (and not give in to gut instinct etc). It turned out that this month was more of the same and I am still on the second stage of the experiment, which is learning to consistently trade the model and iron out the glitches. The third stage is to reach a level of profits equal to my salary, while the fourth stage would be to maximize returns beyond that. I had planned to move to trading two contracts this month, but mostly traded one contract still.

June is the month when our Australian managed funds pay out their main distributions at the end of the Australian financial year. These usually have large tax credits associated with them. In this report, I have estimated the likely tax credits, which won't be known till later in July.

The Australian Dollar fell from USD 0.7571 to USD 0.7391. The MSCI World Index fell 0.50% and the S&P 500 rose 0.62%. The ASX 200 rose 3.63%. All these are total returns including dividends. We gained 3.16% in Australian Dollar terms and 0.71% in US Dollar terms. So, we  underperformed the Australian market and outperformed international markets.

The best performing investment in dollar terms  was CFS Geared Share Fund gaining AUD 23k. The next best in dollar terms was IPE, gaining AUD 19k. The best performing asset class was "private equity", gaining 7.79%. The second best performer was Australian large cap stocks, gaining 3.21%. The worst performing asset class was hedge funds, losing 0.46%, the only asset class that lost money.

The following is table of investment performance statistics computed over the last 36 months of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Beta expresses the change in investment returns for a 1% change in the market. Compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. Alpha shows the risk adjusted excess annual return. This is how much we are beating the market (or not) adjusted for risk expressed as beta. We have a slightly positive alpha compared to the Australian and world markets. Finally, up capture and down capture breaks beta into the response to positive and negative months in the stockmarket. A greater up capture than down capture ratio is desirable. We now capture more of the up movements in the international and less in the Australian market and suffer less of the down movements in both the Australian and international markets. A hedge fund like return would show this positive skew and a positive alpha. We show some hedge fund like properties across the markets.

This month I only made a small amount of money trading futures: USD 1.2k. The table compares my performance to the markets and the models:

The US markets went up and then down, ending quite flat. The models did outperform the market.* Through a series of missteps I performed worse than the models given that I was using leverage. This is mostly because I picked the wrong contract to trade with for some of the time. I think one way to trade in strongly trending markets is to act more tactically, trading in the direction of the model when other short term indicators (using a chart with 3 hour candles) show it is advantageous and then closing the position when the odds move the other way. More than once I was up USD 2k and then gave it all back... On 21 June I did exactly the wrong thing, throwing in the towel for the day and closing my short just as the market was about to reverse and go down... Seeing that happen did increase my faith in the model a little bit more. Gut instinct is not as good as the model. But then the same thing, kind of, happened on the last day of the month. The models were short, the market went up, but I capitulated at almost the worst point, because at the market close the indices were way down from the highs.

The best I can say is that I didn't lose money for the month as a whole. So it looks like more of the same for next month. I'll try to trade one contract exactly according to the model and one tactically.

We made a little more progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged mutual funds.

The improvement in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• I shifted money out of trading when I shifted the account I am trading with. This decreased the allocation to commodities.
• Added another AUD 10k to the Winton Global Alpha fund, increasing the allocation to commodities.
• I sold 500,000 shares in IPE and bought a small amount of OCP.AX, reducing the allocation to private equity.
• I sold some Platinum Capital (PMC.AX) and bought a lot of PIXX.AX, which is the equivalent ETF, because PMC was particularly overvalued. This increased the allocation to hedge funds.

* The statistics at the bottom of the table are based on only 3 months of data and so are not at all reliable yet.

Trading Update: Tokyo Edition

So far it looks like the "old" more systematic model won today. US stocks are down. I'm not trading as I was flying to Japan and now my phone's connectivity is dodgy and I need it as a security device. Anyway, Wednesday is US Independence Day and Tuesday is already a short trading day so, I'll wait till Thursday or when I am back in Australia next week,

My hotel is the blue tower in the background.

P.S.
The stockmarket turned and went up. So, the "new" model was vindicated in the end. Still, I don't like trading rules that don't make logical sense.

Changing the Model Back and Researching the Model

I'm not happy with this model rule that I added on 27th April. It's not very systematic. So, I dropped it, while keeping rules added more recently. The stock market switches between two states - trending and cycling - and the model uses different indicators in each state. Deciding what state we are in is a little problematic. So, I am going to have another look at the rules for that and also possibly smoothing out very small moves, which are noise. The rule I just dropped was ad hoc - it switched to the indicator for the cycling state when we are in a trending state based on one period lagged positive performance.

Monday is a good test of the two algorithms - the simpler model is short and the model with the "ad hoc" rule is long. Let's see which wins.

I also thought of using the volatility indices, VIX and VXN, as indicators. The basic idea is that volatility is highest at bottoms in the market. But I couldn't see a way to do this. This graph shows why:

VXN (and VIX) rose throughout January while the stock market rose too. This was a warning sign that a correction was coming. But a model that shorts the market when VXN is expected to increase would have lost money all January. Also, my existing forecasting model is no good here...

Gold 2048: The Future of Gold

This report seems bullish for the price of gold over the next 30 years. Continued growth in India and limited gold discoveries recently seem bullish. On the other hand, some regions haven't been explored much and technology could enhance extraction, though the latter likely balanced by increased environmental restrictions.

Mercantile Makes Offer to Take Over IPE

Mercantile Capital (MVT.AX) has made an offer to take over IPE.AX at AUD 0.0775 per share. I've discussed Mercantile's interest in IPE before and bought shares as a result. I had 1.5 million shares. My only regret is I didn't buy more. People selling even below 6 cents discouraged me from buying more.

I had 500,000 on offer for sale and they sold just now at 0.075 up from 0.063 yesterday. I will wait and see with the remaining million. I should at least hold it into the next tax year, next month. If I sell now, it will wipe out my existing tax losses and more. So better to defer tax for another year.

Tax Optimization for Trading

I still have some capital losses left over from the financial crisis. I will probably use them up for this tax year ending 30 June. After that, trading profits would be taxed at my marginal rate of 47% (and even higher if Labor get back into power and implement their tax policy). So, I am opening an account at Interactive Brokers for Moominmama (formerly Snork Maiden). Trading in her account will only attract a marginal rate of 34.5% initially and then higher if we make lots of profits. This will reduce our overall tax bill and is totally legitimate in Australia.

Actually, given that franking credits are fully refundable, even if they exceed your tax bill (but Labor wants to change that too), it also would make sense to have other investments in Moominmama's name. The reason we don't, is that up to a couple of years ago, when my income went over AUD 180k per year and she went part-time we were in the same marginal tax bracket. But perhaps I should direct new investments to her account?

In somewhat related news, the minimum wage in Australia has just been raised, so that someone working full time at the minimum wage earns just over AUD 37k a year (about USD 14.25 per hour). This means that the marginal rate for such workers is now also 34.5%! That really seems crazy to me.