Thursday, July 21, 2011

GBP/USD June/July Trade - 2011

I made some bad trades on a long term call I knew would play out. Ended up with greater losses than I should have.

  • Entered on Strong price action 1.6224 June 22, 2011
  • Thesis based on long term fundamentals and inflation based drivers and continued weak US economy
  • Sound trade with bad entry for short term feelings
  • Considering this was my personal account I theoretically was a bit over leveraged. 
  • I reacted on the intraday and didn't wait for the daily chart to close out. 
  • It was about two days below the 00's where I shorted and made some losses back.
  • Had I held on to the trade with less leverage initially the interim downside would not have seemed so bad. 
  • A flurry of risk aversion from the Eurozone caused the GBP to drop big time initially while weak economic data relative to the US exacerbated the move. A lot of it was noise in the short term considering the big reversal in the first half of JULY. 
  • My target was 1.64 plus once the 00's were broken I let fear take over since the R/R ratios were way outta whack and I'd have to expect a target of 1.70 to maintain a 2:1 ratio or 1.66 - 1.67 for a 1:1 ratio. Maintain a 1:1 seems more realistic in the medium term while long term 1.70 is my ideal number. 
  • Scaling up to a full position/pyramiding above 1.625 is a good idea if UK economic data can support the bullish move as risk aversion melts away.
  • Need confirmation in higher crude (CL > 100, ES >1330 and USDX < 74.6) 
  • USDX was used as positioning and timing again the huge spike of false risk aversion led me to bail early. 

I am understanding my style more and being able to reconcile my strength in analysis to a viable trading strategy. I need to be more well capitalized and less leveraged with more smaller positions to work in my favor and to cut the bad ones when charts and fundamentals turn. I need a higher degree of freedom to capture the trend moves I want, this is more akin to long term trading and investing than purely trade oriented styles which I have been trying the past few months. 

Currently GBP needs to break out of the down trend channel/falling wedge to confirm its continued up trend to the end of the year. Strong economic prints required and more rumors of US easing and weak economy will support this. Risk aversion is already a numb factor to prices as EUR/USD maintains above 1.40. Crude fundamentals are a bit more tricky but can be overall supportive of higher prices given demand can remain stable.

Strategy Improvement: Less leverage to withstand the noise and use scaling when chart turns more favorable. I ideally should have held on to this position until full daily and weeks chart confirmed a continued down trend. Currently if prices break to the 1.625+ is where I should have scaled to a full position or pyramided. To targets of at least 1.64 shor term cover some then add back on breaks of 1.65 to 1.67. END year will be risk positive i expect 1.70 and beyond, bar anymore shocks. 

Friday, July 1, 2011

Hedge Fund Industry Sentiments - July 1, 2011 (Q3 begins)

Peter Douglas - the principal of GFIA (Singapore)

"In fact, I think we actually saw more opportunists come into the industry in that period [post 2008],
which worries me. We meet managers who see the business opportunity more clearly
than the investment edge: “well, two and twenty is a great model, we will give the
business three years; if it’s not really profitable after three years we will go back and
work for Morgan Stanley”, or wherever they came from."


My thoughts:

1. 2/20 is not a great model
2. We will see a trend reversal; sell siders who failed at speculation go back to sell side
3. Its really eerie how dead on he is with some of my thoughts.

What Peter talks about is very interesting and dear to me. Often the managers he may encounter are young ambitious young guns who worked for big financial institutions who want to take  a stab at the "Get quick rich schemes of the HF" industry. I would often think these are guys who were the cream of the crop of "target universities," who have only "succeeded" to get where they are. Though, I should not generalize, I would like to believe these are the people who have yet to taste bitter failure or have yet to feel the pains of loosing their own capital to the throws of the market.

To succeed in this industry, to succeed in markets, one has to painstakingly craft his skills and competitive advantage over the years. Bar all metaphysical/post-modernist/philosophical ideas of what is and what is not, there is no escaping this route. Trying to take a shortcut will lead to disaster and undesired outcomes.

The truly scary idea is that newcomers trying their hand at the game will be so reckless in thoughts and actions to let "potential opportunity" impede their ability to perform their fiduciary responsibilities. Also! Let us not be fooled by those who have amazing institutional contacts who can get millions of dollars off the bat to mask weak infrastructures and safeguards meant to protect investors. People will only need to spend a small percentage of fund resources to outsource operations and supposedly build proper risk management infrastructures. For sure all the money in the world can build a great piece of machinery, but what is the use if you don't know how to properly use it? So what use is the manager who doesn't understand the fine nuisances of his business since everything was handed to him so easily?

Well perhaps this is too much of an oversimplification. People who would attempt to start hedge funds surely would not be ignorant, incompetent, or inexperienced right? Or perhaps its more of the case of being either 1. ignorant or 2. being a very clever fellow. Type 1 people who will face disaster and Type 2 people who will have some sort of success.

With this in mind, I too and guilty at times! I think in my weakest moments in building a hedge fund, when the hard became harder and the harder was harder than the hardest, I have actually thought similar sentiments that Peter Douglas was condemning. That being, "Oh if my hedge fund fails, I am young and I can always get a job."  Reading Douglas's comments was just a very clear reminder that I am in this business for the long run. Yes, I am extremely young for this industry, so if I do fail it is an experience to carry through to my next HF venture that will make it stronger and better. That is what the sentiment in my mind should reflect. The reason why I started my venture in this industry because of the entrepreneurial spirit required, because of the mental challenge of markets, and because I have such a strong desire to build and create and help others.

Though if markets have taught me anything, we may like to think in absolutes... that is until we are absolutely wrong. Change is definitely abound, and being young there are more paths to cross than roads to follow. For now at least, I am sticking to the plan.

Analyze Capital LLC

Implicit Cost for Asset Allocators - July 1st 2011

"Minimizing implicit cost," all that work in an academic study to find out that it is something discretionary traders do everyday in smoothing entries and exits on trades. Traders trying to position appropriately will scale in with smoothed market timing. Perhaps this concept is not well understood to the pure asset allocator and pure traditional portfolio managers.

Analyze Capital LLC
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