From 1600 USD to 10T+ USD with a portfolio of stat arb alphas

I have spent the past months developing and automated two statistical arbitrage models and have a third on the way. My models I am using focuses on co-integration, fundamentals, and sentiment to price currencies. They are not systems, rather models because a system (such MA crossover) does not provide useful aspects such as confidence intervals or even a target price. The powerful aspect of my portfolio is beta-neutrality. My models target 0 correlation to the US dollar, and the DJ UBS commodity index. I am currently focusing on Intra Day trading, however once my portfolio approaches the billions it will become difficult to enter my postion's with low slippage and I will have to move towards longer time frame Stat-Arb. I have other models which can hold trades for days or even weeks at a time and still achieve 15%-20% return a year, compare this to 45% on my intra day alphas. Once I build a portfolio of over 250B USD my stat arb strategies will become more difficult to execute profitably, and I will have to move towards time frames of months. I have some very long term fundamental models which can achieve 5%-10% on virtually any amount of money and once I get into trillions of dollars these strategies will be my only option, as applying this level of capital to stat-arb would make markets almost perfectly efficient, and thus speculation for profit will be near impossible. I will build a money market dynasty to last generations.

I obviously cannot do this with 1600 USD alone, so I will have to raise capital. Once I reach 1B USD in AUM I will be able to raise cap from institutional clients such as pensions and thus my fund will explode in growth. Risk management will be very critical, as market/beta neutrality will allow for me to profit during recession, and if my volatility models fail, I could lose big, so I will need to constantly expand my risk management techniques. One key problem once I reach the multi-trillion dollar point, Is that i will be able to manipulate over night lending rates, so I will need to switch from RollOver for Swap, to Bond markets with respect to my long term strategies.

I would also like to expand to the global commodity/futures market, with focuses on Gold, Oil, and EuroDollar/Libor futures. I have many stat-arb models that would work well on these assets, and they are liquid enough to be worth while trading. The EuroDollar/Libor market is especially fascinating to me, and once I have enough capital to safely diversify to these markets It will bring me great joy. In all honesty the emerging markets are my favorite area of FX/Fixed Income, and though many are afraid to touch the EMs, they are very attractive once you hedge their volatility and neutralize their beta.

Hedging is very important, as the FX market is tied very closely to both debt markets and commodity markets. It is a myth in my opinion that there is no bear/bull market in FX. When bear market strikes, Commodity currencies and Corporate Debt plumit, while safe havens such as XAU USD and JPY soar. In bull Market Commodity currencies either rise, or become highly stable, interest rates rise, all together making the famous Carry Trade an appeasing trade. However unhedged the Carry Trade will become toxic during recession. Just look at the Deutsche Bank Currency Return Carry Index on QBIQ. It is an FX Alpha benchmark for carry trade strategies and it fairs horribly in recession. However a beta-neutral/hedged carry trade will remain stable and will pay interest so long as co-integration of asset markets continue. It is similar to the notion of a Long Short Equity portfolio.

Once I must branch out to Corporate/Junk Bond markets for my long term strategies, hedging my fixed income FX trades will become important. I will not only have to hedge my currencies beta, but also my bonds beta. This will become increasingly challenging as I consume entire debt markets in the EM. I may have to cut back on my Emerging market exposure once I reach a multi-trillion dollar status.

While I am currently 16, I must plan for financial success early. I recently had lunch with a hedge fund analyst at whetstone capital, I will not disclose his identity, however he was a very nice man. Unfortunately Whetstone is a Value fund equity fund, and with my expertise quantitative analysis, and my heavily computational approach to modeling risk, he didn't think I was a good fit. However it was a valuable experience none the less, and I am very grateful.

If you have any questions feel free to ask!

It's good to start out young, you have the advantage of time.. I used to have all those wonderful plans of managing millions of dollars when I found a profitable strategy and tested it.. But everyone got a plan until they got punch in their teeth.

I would recommend start taking small steps and setting small goals, start focus on making consistent profits for one year and then start raise a few thousands on the side after you got the track record.. It's a long way to even hit the million marks, probably 5-10 years if you're just starting out without any long track record..

Raising money isn't all about your track record though.. By the time you want to raise millions, you need to be a very good salesman and know how to connect with your investors, you'll received tons of pressure when you manage other ppl funds.. The pressure might make you break your rules (Investors will have a lot of idea on what you should be doing) though you might have a mechanical models in place..

You got all the time to learn and improve, take it slow, take it small..

Ahh yes I am currently focusing on raising funds through close friends, I have secured 2k in future investment, so it is something I am looking forward to.

That's a good start, place more focus on learning and making your track record will make you more likely to get more funds in the future..

My account had positive UPL until market close, I am anticipating a positive return come Sunday market open.

Markets open soon, I have adjusted allocations of my portfolio to meet my 24% max volatility threshold. My expectations of a convergence of EURGBP in my favor holds strong.

While my UPL is unfavorable, my average price move is however favorable.

OANDA SPREADS:

GBPUSD Spread: 10PIPs

EURUSD Spread 7PIPs

Current PIP change since open:

GBPUSD -9.9PIPs

EURUSD -2.8PIPs

when spreads on EURUSD go back to their regular 1.3 PIPs, My net pip change will be 2.9PIPs on EURUSD

when spreads normalize on GBPUSd to 2PIPs my net pip change will be -2 PIPs roughly

This will put me in a more favorable position,

I was in fact correct, my UPL is now positive.

A trade dealt last night on USDTHB USDSGD wiped out gains due to very high spreads on USDTHB.

I have removed my Asian exposures from my portfolio entirely. This will be a lesson for me. USDMXN USDCAD GBPUSD EURUSD AUDUSD NZDUSD are all that I will keep in my portfolio.

Doing further research, USDTHB and USDSGD appear to not be co-integrated thus they never would have made money. Just an example of what occurs when a failure is made trading the emerging markets intra day leads to.

Hi man just want to ask about what did you meant by "sentiment to price currencies"?and what is the relation between your strategy and global macro is it long term ?what indicator's performance you analyze?
also how you use cointegration and risk parity at the same time ?
Sorry for the amout of questions
im interested in chatting via skype
thanks in advance

This thread is old, from one of my prior strategies which I gave out here: http://www.forexfactory.com/showthre...11#post9353911

None the less, the strategy is based on correlation between the trade balances of regional economies which are used to valuate currencies. This is measured through co-integration.

Sentiment, it's change can be compared to the change in value of an asset, and thus used to price assets.

No one indicator, just a linear regression between 2 assets.