Hi ES, fascinating thread you've made, and thanks for the spreadsheets. I've spent about 6 hours poring through them and reading all the posts on this topic. The thing I'm thinking is probably scaring other traders (since it scares me about this) is that
Issue #1: Correlation relationships aren't set in stone and are prone to fluctuate, great example is the recent decoupling of the AUD to Gold, they have a long-term relationship of being highly correlated, but recently have split ways dramatically. Such a divergence can throw off a basket and its DD in a large way.
Issue #2: You have dropped your exposure to the EUR and USD to close to 0, and that's quite an accomplishment, but your exposure is huge on JPY and HUF...
Which country is more likely to have a "fat tail" event that drastically affects its market? The US, EU, Japan, or Hungary? Personally I'd feel more uncomfortable with a large exposure to Hungary, which I know little about, to say, the US, which I feel I have a better grasp and more transparency with. The market is also more liquid in the majors, the main Achille's heel of LTCM, and the HUF ain't that liquid. Put in another light, which country is more likely to default on its debt, or experience a military coup, or have greater political instability?
Issue #3: Complexity... Having a carry basket to begin with, whether 11 or 33 currencies, is bound to confuse a heck of a lot of people. How can you chart that? I don't know of a charting package that can, and although your way of charting the daily UPL of the basket is quite inventive, I think most folks feel uneasy with such a small sample size of data and such complexity of calculations.
Issue #4: I think most traders are just turned off by the idea of buying something, sitting on it, and filling out spreadsheets. I think most traders are looking for action, not necessarily profit.
Anyway, I think you've done a great job so far, and I hope you continue to post about your systems. I wouldn't be too worried about managed accounts, it doesn't surprise me you haven't attracted any interest yet, just re-read this whole thread and you'll see multiple changes to the system and re-thinking it's internal values. It all implies a work-in-progress, and my experience is people want a finished product to invest in rather than a budding rose.
Side note: On your interestcow.xls worksheet where you list current interest rates, why is your APR value halved? Don't understand that, been a while since I sat down APR calculations, but isn't that just the yearly interest? Or am I thinking yield? In any rate, I don't understand why you divide it by 2.
Keep up the good work, this has got me thinking quite a bit, but rather than buying a basket of curriencies that I'm not quite sure how they all correllate or don't to each other, I'd probably focus on the highest-yielding, or maybe top 4, and look to trade in an interest-positive position when they're at a Bollinger Band extreme on a daily chart or something. Still working that out. But I'd feel uncomfortable with 11 curriencies that I'd been shown by you to be relatively stable and give a nice yield simply because as smart as I am, I can't understand the exposure and correllation of the entire basket. And so why trade something I don't understand? I think that's why most people are turned off. And yes, I hear you, and no, I don't know how to explain it since I myself am partly mystified.
-Aksel
Issue #1: Correlation relationships aren't set in stone and are prone to fluctuate, great example is the recent decoupling of the AUD to Gold, they have a long-term relationship of being highly correlated, but recently have split ways dramatically. Such a divergence can throw off a basket and its DD in a large way.
Issue #2: You have dropped your exposure to the EUR and USD to close to 0, and that's quite an accomplishment, but your exposure is huge on JPY and HUF...
Which country is more likely to have a "fat tail" event that drastically affects its market? The US, EU, Japan, or Hungary? Personally I'd feel more uncomfortable with a large exposure to Hungary, which I know little about, to say, the US, which I feel I have a better grasp and more transparency with. The market is also more liquid in the majors, the main Achille's heel of LTCM, and the HUF ain't that liquid. Put in another light, which country is more likely to default on its debt, or experience a military coup, or have greater political instability?
Issue #3: Complexity... Having a carry basket to begin with, whether 11 or 33 currencies, is bound to confuse a heck of a lot of people. How can you chart that? I don't know of a charting package that can, and although your way of charting the daily UPL of the basket is quite inventive, I think most folks feel uneasy with such a small sample size of data and such complexity of calculations.
Issue #4: I think most traders are just turned off by the idea of buying something, sitting on it, and filling out spreadsheets. I think most traders are looking for action, not necessarily profit.
Anyway, I think you've done a great job so far, and I hope you continue to post about your systems. I wouldn't be too worried about managed accounts, it doesn't surprise me you haven't attracted any interest yet, just re-read this whole thread and you'll see multiple changes to the system and re-thinking it's internal values. It all implies a work-in-progress, and my experience is people want a finished product to invest in rather than a budding rose.
Side note: On your interestcow.xls worksheet where you list current interest rates, why is your APR value halved? Don't understand that, been a while since I sat down APR calculations, but isn't that just the yearly interest? Or am I thinking yield? In any rate, I don't understand why you divide it by 2.
Keep up the good work, this has got me thinking quite a bit, but rather than buying a basket of curriencies that I'm not quite sure how they all correllate or don't to each other, I'd probably focus on the highest-yielding, or maybe top 4, and look to trade in an interest-positive position when they're at a Bollinger Band extreme on a daily chart or something. Still working that out. But I'd feel uncomfortable with 11 curriencies that I'd been shown by you to be relatively stable and give a nice yield simply because as smart as I am, I can't understand the exposure and correllation of the entire basket. And so why trade something I don't understand? I think that's why most people are turned off. And yes, I hear you, and no, I don't know how to explain it since I myself am partly mystified.
-Aksel
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