DOCSLIB.ORG

Statistical Arbitrage Trading: How to Diversify to Generate Alpha

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Statistical Arbitrage Trading: How to Diversify to Generate Alpha Statistical Arbitrage How to diversify to generate Alpha Table of Contents Page I. Executive summary 3 II. Investment Strategies 4 III. Advantages of our system 5 IV. Performance 2013 6 V. Performance since inception 7 VI. How our trading system works 8 VII. BNP: Beta Neutral Portfolio 10 VIII. GYC: Introducing Global Yield Curves 11 IX. GYC: Yield Curve Strategies 12 X. GYC: Pairs trading long term rates 13 XI. GYC: Risk Management 14 XII. GYC: Performance 15 XIII. Why diversification? 16 XIV. Alpha generator 17 XV. Portfolio Revisions 18 XVI. Questions and answers 19 XVII.Investor Contacts 20 XVIII.Disclaimer 21 2 Executive Summary 3 Investment Strategies It has been proven that long only and static asset allocation methodologies are incapable of enduring the peak-to-through decline of the markets. 4 Advantages of our system 5 Performance - 2013 20.0% S&P500 Total R eturn Key statistics Hang Seng TRZ J PM Asian B ond Index 15.0% Return (Jan’ 13 – Apr’13) 18.28% Return (Annualised) 55.91% Std Dev (Annualised) 17.01% 10.0% Sharpe Ratio 3.29 Sortino Ratio 8.39 5.0% Alpha (Annualised) 57.27% Beta (vs S&P500) -4.49% 0.0% Max Drawdown -1.71% VaR (Montecarlo @ 99.9%) -5.50% -5.0% Correlations TRZ vs S&P500 -10.60% TRZ vs Hang Seng 7.60% -10.0% TRZ vs JPM Asian Bond Index -2.95% 6 Performance – Since inception 35.0% S&P500 Total R eturn Hang Seng Key statistics TRZ 30.0% J PM Asian B ond Index Return (Inception – Apr’13) 35.13% 25.0% Return (Annualised) 52.13% Std Dev (Annualised) 15.67% 20.0% Sharpe Ratio 3.33 Sortino Ratio 4.52 15.0% Alpha (Annualised) 54.36% Beta (vs S&P500) -10.06% 10.0% Max Drawdown -2.54% 5.0% VaR (Montecarlo @ 99.9%) -6.40% 0.0% Correlations TRZ vs S&P500 -19.76% -5.0% TRZ vs Hang Seng -0.19% TRZ vs JPM Asian Bond Index -11.11% 7 How our trading system works 8 How our trading system works 9 BNP: Beta Neutral Portfolio The BNP strategy assumptions are fairly easy to assess. From a mathematical point of view we apply part of the propositions theorized by Frazzini and Pedersen in their last paper. The remaining part is a proprietary model. 10 GYC: Introducing Global Yield Curves 11 GYC: Yield Curve strategies Parallel shift 3.0% GYC captures most yield curve movements 2.5% Parallel shifts, steepening/flattening, butterfly trades 2.0% Returns on same assets but low correlation 1.5% T Positive carry and duration neutrality T+1 1.0% Directional in the level, slope and convexity To Maturity Yield 0.5% 0.0% 2Y 5Y 10Y Maturity 30Y Source: Diarch Research Flattening Convexity Increase 2.5% 3.0% 2.5% 2.0% 2.0% 1.5% T+1 T+1 1.5% T T 1.0% 1.0% YieldMaturity To Yield To Maturity Yield 0.5% 0.5% 0.0% 0.0% 2Y 5Y 10Y Maturity 30Y 2Y 5Y 10Y Maturity 30Y Source: Diarch Research Source: Diarch Research 12 GYC: Pairs Trading long term rates 13 GYC: Risk Management 14 Performance Since we started diversifying among strategies our trading system has consistently produced average returns around with very low draw downs. To achieve these returns we use a leverage of around 5 times the AUM which guarantees a very good trade-off between risk and returns. If the investor can afford a higher risk appetite this can be increased. 15 Why diversification? 16 Alpha Generator 83% Positive Alpha 1.200% 1.000% 17% Negative Alpha 0.800% 0.600% 0.400% 0.200% 0.000% 0 50 100 150 200 -0.200% -0.400% -0.600% 17 Portfolio Revisions 18 Questions & Answers 19 Contacts Jos Van Trier Partner and founder +31 (0) 888 723 900 [email protected] Giancarlo Cobino Fund Manager + 31 (0) 208 083 863 [email protected] [email protected] www.trzfunds.com 20 Disclaimer 21 .
Load more

Recommended publications
  • What Happened to the Quants in August 2007?∗
    What Happened To The Quants In August 2007?∗ Amir E. Khandaniy and Andrew W. Loz First Draft: September 20, 2007 Latest Revision: September 20, 2007 Abstract During the week of August 6, 2007, a number of high-profile and highly successful quan- titative long/short equity hedge funds experienced unprecedented losses. Based on empir- ical results from TASS hedge-fund data as well as the simulated performance of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid un- winding of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a sudden liqui- dation by a multi-strategy fund or proprietary-trading desk, possibly due to margin calls or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses on August 9th by triggering stop-loss and de-leveraging policies. A significant rebound of these strategies occurred on August 10th, which is also consistent with the sudden liquidation hypothesis. This hypothesis suggests that the quantitative nature of the losing strategies was incidental, and the main driver of the losses in August 2007 was the firesale liquidation of similar portfolios that happened to be quantitatively constructed. The fact that the source of dislocation in long/short equity portfolios seems to lie elsewhere|apparently in a completely unrelated set of markets and instruments|suggests that systemic risk in the hedge-fund industry may have increased in recent years.
    [Show full text]
  • Statistical Arbitrage: Asset Clustering, Market-Exposure Minimization, and High-Frequency Explorations
    Statistical Arbitrage: Asset clustering, market-exposure minimization, and high-frequency explorations. Aniket Inamdar([email protected]), Blake Jennings([email protected]), Bernardo Ramos([email protected]), Yiwen Chen([email protected]), Ben Etringer([email protected]) Stanford University MS&E 448, Spring 2016 Abstract In this paper we describe and implement two statistical arbitrage trading strategies. The first strategy models the mean-reverting residual of a cluster of assets whose weights are selected so as to minimize market exposure. The second strategy maintains a portfolio of pairs, each weighted proportional to a measure of mean-reversion speed. We present performance metrics for each strategy, discuss the difficulties of their application into high-frequency trading, and suggest a direction where future research could focus. 1 Introduction The technique of statistical arbitrage is the systematic exploitation of perceived mispricings of similar assets. A trading strategy built around statistical arbitrage involves three fundamental pillars: (1) a measure of similarity of assets, (2) a measure of pricing mismatch, and (3) a confidence metric for each mismatch. Traditional statistical arbitrage techniques, like \Pairs Trading", employ these three pillars, holding long-short positions in a pair of strongly \similar" assets. The covariance (or correlation) between two assets is a widely used metric of their \similarity". However, recent studies have used additional attributes such as co-integration tests to select asset pairs that are better suited for a statistical arbitrage trading strategy. We base our signal generation strategy on the seminal paper [3], whose theory is briefly described in Sec. 2. Next, Sec. 3.1 describes a strategy to select assets to perform statistical arbitrage on.
    [Show full text]
  • Oklahoma Police Pension and Retirement Fund Statement Of
    Oklahoma Police Pension and Retirement Fund Investment Policy OKLAHOMA POLICE PENSION AND RETIREMENT FUND STATEMENT OF INVESTMENT POLICY OBJECTIVES AND GUIDELINES The Oklahoma Police Pension and Retirement Board has formulated a statement of investment policy which follows. Included and met therein are requirements such as the retention of money managers who must be granted full discretion and evaluation procedures for purposes of furnishing data necessary for the preparation of periodic financial statements. The investment policy of the Oklahoma Police Pension & Retirement Board has been developed from a comprehensive study and evaluation of many alternatives investigated. The primary objective of this policy is to implement a plan of action which will result in the highest probability of maximum investment return from the Fund's assets available for investment within an acceptable level of risk. The cornerstone of our policy rests upon the proposition that there is a direct correlation between risk and return for any investment alternative. While such a proposition is reasonable in logic, it is also provable in empirical investigations. The Board periodically reviews the strategic asset allocation to insure that the expected return and risk (as measured by standard deviation) is consistent with the System's long term objectives and tolerance for risk. Additionally, it is appropriate to review investment return in real terms (net of inflation) and to take into consideration the probability of investment return in the decision making process. Because of inflation it is essential that the value added by the Fund's investment management be appropriate not only to meet inflationary effects but also to provide additional returns above inflation to meet the investment goals of the Fund.
    [Show full text]
  • How Profitable Is Capital Structure Arbitrage?
    How ProÞtable Is Capital Structure Arbitrage? Fan Yu1 University of California, Irvine First Draft: September 30, 2004 This Version: January 18, 2005 1I am grateful to Yong Rin Park for excellent research assistance and Vineer Bhansali, Nai-fu Chen, Darrell Duffie, Philippe Jorion, Dmitry Lukin, Stuart Turnbull, Ashley Wang, Sanjian Zhang, Gary Zhu, and seminar participants at UC-Irvine and PIMCO for insightful discussions. The credit default swap data are acquired from CreditTrade. Address correspondence to Fan Yu, UCI-GSM, Irvine, CA 92697-3125, E-mail: [email protected]. How ProÞtable Is Capital Structure Arbitrage? Abstract This paper examines the risk and return of the so-called “capital structure arbitrage,” which exploits the mispricing between a company’s debt and equity. SpeciÞcally, a structural model connects a company’s equity price with its credit default swap (CDS) spread. Based on the deviation of CDS market quotes from their theoretical counterparts, a convergence-type trading strategy is proposed and analyzed using 4,044 daily CDS spreads on 33 obligors. We Þnd that capital structure arbitrage can be an attractive investment strategy, but is not without its risk. In particular, the risk arises when the arbitrageur shorts CDS and the market spread subsequently skyrockets, resulting in market closure and forcing the arbitrageur into liquidation. We present preliminary evidence that the monthly return from capital structure arbitrage is related to the corporate bond market return and a hedge fund return index on Þxed income arbitrage. Capital structure arbitrage has lately become popular among hedge funds and bank proprietary trading desks. Some traders have even touted it as the “next big thing” or “the hottest strategy” in the arbitrage community.
    [Show full text]
  • PRAVEEN JOSEPH, CFA SENIOR FIXED INCOME PORTFOLIO MANAGER  Washington, D.C  202-290-0464  [email protected]
    PRAVEEN JOSEPH, CFA SENIOR FIXED INCOME PORTFOLIO MANAGER Washington, D.C 202-290-0464 [email protected] ACADEMICS & PROFESSIONAL SUMMARY: Senior Fixed Income Portfolio Manager for IFC Treasury. 12 years’ experience working in London, New York and Washington DC. Prior experience in Investment Banking, Investment Management and Hedge Funds. Strong quantitative background with undergraduate degree in engineering from IIT Madras and applied master’s in Quantitative finance and economics from the London School of Economics. Direct experience in trading and independently managing the securitized credit portfolio for over 4 years. Extensive experience in stochastic models, financial forecasting, Markov chain Monte Carlo simulations, Algo. trading and complex derivative securities pricing. PROFESSIONAL EXPERIENCE IFC TREASURY, Washington DC | Senior Portfolio Manager 2013 – PRESENT Currently managing $4.8 Billion in US securitized credit assets (ABS, RMBS, CMBS) with a RAROC of 68% and PnL of $76 Million in FY18 contributing to 15% of the total corporation’s revenue. Performed credit selection and due-diligence for over 500 transactions in, Cash flow modelling in ‘Intex’ and trading of hedges for ABS, RMBS & CMBS securities in ‘Bloomberg’. Senior trader and project leader (managed a team of 6) for Financial Machine Learning toolkit which culminated in creating a python based Algorithmic trading platform, the very first of its kind developed at IFC. Selected amongst 155 IFC Treasury colleagues to be on an exchange assignment at EBRD in London for 18 months - helped manage the corporate bond, ABS and derivative portfolio plus inter-organizational knowledge sharing. Developed statistical macro trading models in G20 rates (Swaps, Swaptions. X-CCY Swaps, FX Swaps, Futures and TIPS) developed strong ABS trading relationships at JPMorgan, Goldman Sachs, Credit Suisse, Morgan Stanley et al.
    [Show full text]
  • How Profitable Is Capital Structure Arbitrage?
    How ProÞtable Is Capital Structure Arbitrage? Fan Yu1 University of California, Irvine First Draft: September 30, 2004 This Version: June 3, 2005 1I am grateful to Yong Rin Park for excellent research assistance, and Vineer Bhansali, Jef- ferson Duarte, Darrell DufÞe, Robert Jarrow, Haitao Li, Francis Longstaff, Donald Smith, Stuart Turnbull, and seminar/conference participants at Boston University, California State University- Fullerton, Cornell University (ORIE), PIMCO, University of California-Irvine, University of Washington, and the 15th Derivative Securities Conference at the FDIC for comments. I would especially like to thank Philippe Jorion for drawing my attention to this facscinating topic and Gary Zhu for educating me on the credit default swaps market. Address correspondence to Fan Yu, The Paul Merage School of Business, University of California-Irvine, Irvine, CA 92697-3125, E-mail: [email protected]. How ProÞtable Is Capital Structure Arbitrage? Abstract This paper examines the risk and return of the so-called “capital structure arbitrage,” which exploits the mispricing between a company’s debt and equity. SpeciÞcally, a structural model connects a company’s equity price with its credit default swap (CDS) spread. Based on the deviation of CDS market spreads from their theoretical counterparts, a convergence-type trading strategy is proposed and analyzed using 135,759 daily CDS spreads on 261 obligors. At the level of indi- vidual trades, the risk of the strategy arises when the arbitrageur shorts CDS and the market spread subsequently skyrockets, forcing the arbitrageur into early liq- uidation and engendering large losses. An equally-weighted portfolio of all trades produces Sharpe ratios similar to those of other Þxed-income arbitrage strategies and hedge fund industry benchmarks.
    [Show full text]
  • What Is Statistical Arbitrage?
    Theoretical Economics Letters, 2018, 8, 888-908 http://www.scirp.org/journal/tel ISSN Online: 2162-2086 ISSN Print: 2162-2078 What Is Statistical Arbitrage? Marco Lazzarino*, Jenny Berrill, Aleksandar Šević School of Business, Trinity College, Dublin, Ireland How to cite this paper: Lazzarino, M., Abstract Berrill, J. and Šević, A. (2018) What Is Statis- tical Arbitrage? Theoretical Economics Let- Statistical Arbitrage (SA) is a common financial term. However, there is no ters, 8, 888-908. common definition in the literature while investors use the expression SA for https://doi.org/10.4236/tel.2018.85063 a variety of different strategies. So, what is SA? In order to answer this ques- Received: February 2, 2018 tion, we investigate SA strategies across equity, fixed income and commodity. Accepted: April 6, 2018 The analysis of strategies’ key features indicates that no existing definition Published: April 9, 2018 fully describes them. To bridge this gap, we identify a general definition and propose a classification system that encompasses the current forms of SA Copyright © 2018 by authors and Scientific Research Publishing Inc. strategies while facilitating the inclusion of new types as they emerge. This work is licensed under the Creative Commons Attribution International Keywords License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/ Statistical Arbitrage, Investment Strategies, Classification Open Access 1. Introduction The concept of arbitrage is fundamental in financial literature and has been used in classical analysis of market efficiency [1] [2], whereby arbitrage opportunities are quickly exploited by investors. However, pure arbitrage opportunities are unlikely to exist in a real trading environment [3] [4].
    [Show full text]
  • Ipe Survey Fund of Hedge Funds
    INVESTMENT IPE SURVEY FUND OF HEDGE FUNDS Company Abbey Aberdeen Asset Alternative Investment Aurum Fund Capital Management Group Services Management Total assets in fund of hedge funds (FoHFs) (€m) 3,462 8,886.7 743 1,861.23 As at 30/09/17 30/06/17 30/09/17 30/09/17 Total AUM worldwide (€m) 3,462 346,686 743 1,861.23 Assets in flagship FoHFs strategy (€m) 109.3 (1) 1,304.24 (3) Number of FoHFs offered 35 (4) FoHFs assets managed for Europe-based institutional clients (€m) 112 1,038.6 910.65 Pension fund clients 185 746 Insurance company clients 36.01 All other institutional clients 853.6 128.64 Distinct institutional share classes on products offered? Yes Yes Total AUM in FoHFs invested through (€m): Segregated managed accounts 7,744.7 918.15 Pooled vehicles 1,142 943.08 Number of funds domiciled in: The Cayman Islands 10 The British Virgin Islands 0 The Channel Islands 1 Ireland 2 3 Luxembourg 1 Other European 7 Other ex-European 14 15 (5) Minimum investment level for flagship FoHFs product $0.25m $10m Flagship FoHFs product - Fees: Management fee 50bps 1% Performance fee NA 10% Hurdle rate for the performance fee NA 5% High water mark for the performance fee NA (6) Flagship FoHFs product - Redemption: Frequency with which investors can redeem assets Q M Notice period for redemptions 37 cal. days 3 cal. months Other redemption conditions None (7) Flagship FoHFs product (%): Top-down strategy selection 30 25 Bottom-up manager selection 60 65 Risk-based portfolio optimisation 10 10 Flagship FoHFs product - Allocation to strategy groups
    [Show full text]
  • Statistical Arbitrage with Mean-Reverting Overnight Price Gaps on High-Frequency Data of the S&P
    Journal of Risk and Financial Management Article Statistical Arbitrage with Mean-Reverting Overnight Price Gaps on High-Frequency Data of the S&P 500 Johannes Stübinger * and Lucas Schneider Department of Statistics and Econometrics, University of Erlangen-Nürnberg, Lange Gasse 20, 90403 Nürnberg, Germany; [email protected] * Correspondence: [email protected] Received: 27 February 2019; Accepted: 26 March 2019; Published: 1 April 2019 Abstract: This paper develops a fully-fledged statistical arbitrage strategy based on a mean-reverting jump–diffusion model and applies it to high-frequency data of the S&P 500 constituents from January 1998–December 2015. In particular, the established stock selection and trading framework identifies overnight price gaps based on an advanced jump test procedure and exploits temporary market anomalies during the first minutes of a trading day. The existence of the assumed mean-reverting property is confirmed by a preliminary analysis of the S&P 500 index; this characteristic is particularly significant 120 min after market opening. In the empirical back-testing study, the strategy delivers statistically- and economically-significant returns of 51.47 percent p.a.and an annualized Sharpe ratio of 2.38 after transaction costs. We benchmarked our trading algorithm against existing quantitative strategies from the same research area and found its performance superior in a multitude of risk-return characteristics. Finally, a deep dive analysis shows that our results are consistently profitable and robust against drawdowns, even in recent years. Keywords: computational finance; asset pricing models; overnight price gaps; financial econometrics; mean-reversion; statistical arbitrage; high-frequency data; jump-diffusion model 1.
    [Show full text]
  • Lecture 6: Back-Testing Statistical-Arbitrage Strategies
    Lecture 6: Back-testing statistical-arbitrage strategies Marco Avellaneda G63.2936.001 Spring Semester 2009 Simulation of trading Profit/Loss = Qi,n investment in stock i at the start of period n = Ri,n dividend - adjusted return of stock over period n r = Fed Funds rate or reference rate for cash r +δr = interest paid for cash on long stock r −δr = interest received for cash on short stock ε = market impact + clearing & commission s = En equity in the account at start of period n Typically, we will assume ε = 5 bps = .0 0005 , and δr = ,0 for simplicity Basic P/L equation N N = + ∆ + − ∆ En+1 En r tE n ∑Qi,n Ri,n r t∑Qi,n i=1 i=1 N N −δ ∆ −ε − r t∑ Qi,n ∑ Qi,n+1 Qi,n i=1 i=1 N ∑ Qi,n i=1 Λ = = leverage ratio En + Λ = Long Market Value Short Market Value Equity Examples of Leverage L Long-only: Λ = E Long-only, Reg T: L ≤ 2E ∴ Λ ≤ 2 (margin acct) 130-30 Investment L = 3.1 E, S = 3.0 E ∴ Λ =1.6 funds Long-short $-Neutral, Reg T: L + S ≤ 2E ∴ Λ ≤ 2 : Λ Long-short, Equal target ≤ ± max E ∴ ≤ Λ position in each stock Qi ∑ Qi max E N i Sharpe Ratio 1 Nperiods E − E µ = ∑ n n−1 Expected return ∆ over simulation period tN periods n=1 En−1 2 1 Nperiods E − E σ 2 = ∑ n n−1 − µ∆t Variance over ∆ simulation period tN periods n=1 En−1 µ − r S = Sharpe Ratio σ The Sharpe ratio measures returns above the risk-free rate.
    [Show full text]
  • Hedge Funds: a Dynamic Industry in Transition∗
    Hedge Funds: A Dynamic Industry In Transition∗ Mila Getmansky†, Peter A. Lee‡, and Andrew W. Lo§ This Draft: July 28, 2015 Abstract The hedge-fund industry has grown rapidly over the past two decades, offering investors unique investment opportunities that often reflect more complex risk exposures than those of traditional investments. In this article we present a selective review of the recent academic literature on hedge funds as well as updated empirical results for this industry. Our review is written from several distinct perspectives: the investor’s, the portfolio manager’s, the regulator’s, and the academic’s. Each of these perspectives offers a different set of insights into the financial system, and the combination provides surprisingly rich implications for the Efficient Markets Hypothesis, investment management, systemic risk, financial regulation, and other aspects of financial theory and practice. Keywords: Hedge Funds; Alternative Investments; Investment Management; Long/Short; Illiquidity; Financial Crisis. JEL Classification: G12 ∗We thank Vikas Agarwal, George Aragon, Guillermo Baquero, Monica Billio, Keith Black, Ben Branch, Nick Bollen, Stephen Brown, Jayna Cummings, Gregory Feldberg, Mark Flood, Robin Greenwood, David Hsieh, Hossein Kazemi, Bing Liang, Tarun Ramadorai, and two anonymous referees for helpful comments and suggestions. The views and opinions expressed in this article are those of the authors only and do not necessarily represent the views and opinions of any other organizations, any of their affiliates or employees, or any of the individuals acknowledged above. Research support from the MIT Laboratory for Financial Engineering is gratefully acknowledged. †Isenberg School of Management, University of Massachusetts, 121 Presidents Drive, Room 308C, Amherst, MA 01003, (413) 577–3308 (voice), (413) 545–3858 (fax), [email protected] (email).
    [Show full text]
  • HEDGE FUNDS: by Franklin R
    HEDGE FUNDS: by Franklin R. Edwards and Stav Gaon, WHAT DO WE KNOW? Columbia University Business School hile hedge funds have been around since well understood by their own investors, much less at least the 1940s, it has been only in the by their bankers and derivatives counterparties. W last decade or so that they have attracted LTCM had managed to build up so much leverage widespread attention. Investors—mainly both on- and off-balance sheet that when their wealthy individuals but increasingly also institu- investments soured they were unable to meet the tional investors—are turning to hedge funds because demands of their creditors and counterparties. The of the prospect of earning high returns even when result could have been a “firesale” of LTCM’s posi- returns on other asset classes like stocks and bonds tions and a systemic liquidity shortage, with sharp are low or negative. This prospect, not surprisingly, changes in asset prices and uncertain consequences has sparked still more interest in hedge funds in for the stability of financial markets. But the Federal recent years, with plummeting returns on stocks Reserve did not wait for this to happen. It arranged around the world prompting investors to pursue a bailout by LTCM’s largest creditors and derivatives alternative investment strategies that might insulate counterparties, preventing a “run” on the hedge them in the future from the kind of bear market we fund. Over the course of the following year, a have been experiencing. creditor committee managed LTCM’s positions and Intrigued by claims that hedge funds provide effected an orderly liquidation.
    [Show full text]