This Hedge fund, worth $1,000,000, of four Actuarial Science students, operating within the Alternative Investment Market is designed to achieve excess returns. The fund aimed to beat the S&P 500 index. The fund opened on February 2nd 2017 and investing ended on April 8th 2017. Leverage and short selling have been used and the fund aims to invest in various asset classes within the AIM such as commodities and derivatives.
The team’s main investment philosophy revolves around the 3 M’s. Keeping a composed Mind-set, employing Money Management techniques and keeping to the defined Method specified in the investment strategy.
High risk strategies have been implemented. Hedging and risk management strategies were also applied to ensure the risks taken are well mitigated. Fundamental and Technical analysis were used to aid predictions of price movements. Capital appreciation and collecting interest, equity-option strategies and event driven trading form our long, medium and short term strategies respectively.
The fund was faced by several constraints: short trading time, other degree commitments along with constraints specific to the trading platform we used, called Stocktrak.
The fund mainly invested in equities and commodities:
• The success rate provided by equites was varied, with our largest and most damaging losses occurring as a result of speculation of fundamentals and overtrading. Short-term trading taught crucial lessons over the ideas about earnings’ speculations, IPOs and usage of quantitative and qualitative models to assess the validity of each investment. At the same time, the long-term equity tactics build up by protective put, covered call and equity hedge strategies appeared to be successful. It should also be noted that the management of the portfolio with respect to equities was carried out in the same way as the management of hedge funds is done – though dynamic reallocations of assets and timely out-scaling of positions.
• Commodities was one of the areas of our greatest improvements, as well as the knowledge received about the instrument. Initially cautious approach to gold trading was replaced by a full focus on commodity futures markets in order to recover the damaged return of the portfolio and in order to exploit further diversification benefits. During discovering of commodities, our technical analysis skills were heavily improved too. With a development of gold trading ability, further metal, agriculture and even energy asset positions were entered. Important lessons were learnt with respect to the reasons behind the trends in commodity markets and about the influence of fundamentals with subsequent consequences on demand-and-supply market equilibriums. The current political and macroeconomic state of the globalized world allowed us to spot crucial relationships between external factors and commodity markets efficiently. New hedging opportunities were discovered as a result of knowledge received about the connections between certain currency pairs and commodity instruments. The natural gas issue also proved that commodity markets might be much more random than most of ordinary traders expect.
The graph shows the portfolio’s performance against its benchmark, the S&P 500. The portfolio’s return was consistently higher than the S&P 500. The value of the fund is seen to fall below its benchmark for a minute period, but instantly recovers. The returns are extremely volatile. This volatility however, is to be expected as risky trades were carried out in order to make higher profits.
Date Fund Value ($) % Return Trades Made Class Rank
02/02/2017 1,000,000.00 N/A 0 N/A
01/03/2017 1,044,062.00 4.41% 76 1
07/03/2017 1,044,795.05 4.48% 121 1
15/03/2017 989,237.09 -1.08% 271 16
23/03/2017 1,047,231.09 4.72% 398 2
28/03/2017 1,068,714.05 6.87% 445 1
07/04/2017 1,082,473.93 8.25% 604 1
This table shows the performance of the portfolio at key periods in time. Initially up until March 7th 2017, the fund experienced steady growth. The return of the portfolio was over 4% and the fund was ranked first amongst its peers. However, due to the risky nature of the investment strategy and some poor trades being executed, the portfolio suffered. On March 15th the portfolio had negative a return and the fund was ranked very poorly compared to its peers. Our risk management and disaster recovery plans proved to be effective as the fund bounced back. On March 23rd 2017 the fund was ranked second and achieved a return similar to that of before the crash. Then the fund achieved steady growth. A key point to observe, excluding the crash, the fund was consistently ranked first amongst our competitors. The fund also showed its ability to recover from a setback. On the final day of trading, the fund has executed over 600 trades, was ranked number one and achieved a return of 8.25%.
This report extensively describes the existence of this fund. Mentioned below is the fund’s investment philosophy and strategy. The constraints faced by the team are also detailed. The conduct section of the report thoroughly describes trades made specific to each asset class and highlights areas of success and failure. The report also contains detailed evaluation of our performance and explains how the fund evolved over time. The SWOT analysis was build up to give a clear and structured idea of the main trading pros and cons of the group 1, highlighting future opportunities and potential losses as well. Finally, recommendations are made explaining how we will improve and how we would do it differently in hindsight. All references are highlighted in the footer of the page.
The Alternative Investment Market
This hedge fund, alongside investing in traditional asset classes will also invest in the Alternative Investment Market (AIM). Many market makers constitute this market, the main being Hedge funds. This team will be trading like a hedge fund and experience the perks associated such as: no or little regulation and the ability to short sell and use leverage.
Hedge funds employ hedging techniques to achieve significant returns. They tend to open ‘short’ positions, allowing themselves to sell stocks they don’t own, therefore capitalising on negative price movements.
Hedge funds also use leverage; ‘Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment’.
The returns of a hedge fund are measured using the Capital Asset Pricing Model, which is represented as a linear function of alpha (α) and beta (β).
• Alpha (α) measures the additional return which is not linked to market such as: analytical skills, investment ideas, portfolio & risk management, flexibility and regulatory freedom.
• Beta (β) measures the sensitivity of the rate of return to market such as: market conditions, liquidity, volatility, correlations and risk (probability) of corporate events.
Alternative assets will be the main investment avenue this hedge fund will pursue. Although there is no clear definition, alternative assets are unconventional investments within existing asset classes. These include: private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts
This group is comprised of four Actuarial Science students. $1,000,000 will be invested by this team into global markets, effectively taking the role of a hedge fund. The Alternative Investment Management coursework project spans two months and therefore this group will operate the fund for the same term (02/02/2017 – 08/04/2017). Simulated money will be invested using “StockTrak”. StockTrak is a trading platform widely used by universities as a learning platform for their students.
Goals and Objectives
The main objective of the fund is to make excessive returns, greater than those of competing hedge fund teams. The returns of this hedge fund will be benchmarked against the S&P 500 index. The S&P 500 is derived of a composition of the top 500 US firms and thus provides a good representation of market conditions.
This teams’ prior knowledge of trading and investing is minimal. Classroom knowledge, derived from Alternative Investment Management lectures, will be practiced. Further, new skills, which will be learnt and developed over the term of this exercise, will also be applied to the portfolio
StockTrak enables this hedge fund to invest in global markets. However, the team has opted to focus mainly in US (United States of America) markets. This is due to the new US-President, Donald Trump, being pro-business. This is a key factor that is going to influence our predictions with respect to whether the US market is likely to thrive.
In a hedge fund, teamwork is imperative to ensure that the portfolio is performing to its optimum level. This team aims to keep in regular contact. All members of our team live in different areas of London and, therefore, communication may prove to be a problem.
To tackle this issue, a common ‘WhatsApp’ group chat will be opened and regular conference calls through ‘Skype’ will be held. This will allow us to share our research and ideas, whilst also regulating and monitoring our portfolio. When analysing a particular investment opportunity, the team will be rigorous and thorough in its analysis. Discussions and debates may be held to fully argue for and against the investment opportunity to ensure the teams selection of investments is well thought-out.
This team comprises of risk takers. However, the team believes in taking smart risks and always hedging to minimise losses incurred. The members of this group aim also to be ‘good traders’ and are guided by the ‘3M’ framework. This will be achieved through keeping a strong Mind when making trades, by not getting frustrated by losses and not becoming over-confident when winning trades are made. It is also key to employ Money Management strategies to ensure the safety of the portfolio. It is imperative to stick to the teams outlined investment Method. The following types of investing will be undertaken:
• Value Investing: Seeking relatively undervalued stocks and believing they will eventually produce strong returns.
• Fundamentals Investing: Identifying companies with strong earnings prospects.
• Growth Investing: Buying into companies that have promising emerging products or services that hold promising growth potential.
• Technical Investing: Examining past market data to look for hallmark visual patterns in trading activity to make buy and sell decisions.
There are a wide variety of instruments available to invest in. This hedge fund will mainly be focusing on:
• Options and Futures
Whilst also potentially investing in:
• Exchange rates spots
• Corporate and Government Bonds
• Mutual funds
The Fundamental analysis undertaken will mainly consist of using news articles, economic statistics and financial statements to essentially understand the securities to be invested in. The aforementioned means of research will also be used to predict the future price movements of potential investment instruments. Current economic and market conditions will also aid the decisions of the team. Factors such as Brexit and Donald Trump being elected the President of the US will create uncertainty in this make. Due to the high-risk nature of this team, the opportunities arising from these factors, as well as others, will be traded.
Technical analysis will be used to strengthen the predictions made from fundamental analysis. Although this method is not 100% accurate, it will aid future predictions of price movements. Bollinger Bands will be used to monitor the volumes traded of the assets the fund is concerned with. Moving Averages will enable the trends in prices over certain periods of time to be seen. Support and Resistance lines can be derived by using Fibonacci retracements. Head and Shoulders, Flag, Double Top/Bottom, Elliot Wave and ABC techniques will further be aid predictions of price patterns.
This hedge funds trading strategy is devised around the time-period of the investment:
Short-term trading strategies are for trades which will be held for less than one week.
This will mainly revolve around reacting to earnings and dividends reports, news articles and economic calendars. This trading will be high risk as no hedging strategies will be used, but fast profits can be expected. An example of this would be reacting to a positive earnings report and then placing a buy position on the equity with the hope that the value of the equity will rise. The equity would them be sold when there is indication that the price will not rise further. This will be indicated via volumes traded and through observing the equity trading sideways.
Equities are relatively volatile and thus short term profits can be made. The value of commodities can be influenced by many supply and demand determinants and news affecting commodities is released very frequently. Therefore, short term returns can also be made opportunistically from commodities.
Initial Public Offerings (IPO’s), are also an extremely attractive short-term investment. We will be inspecting new IPO’s and conduct fundamental analysis of the underlying company to aid our investment decision. Technical analysis is difficult to implement on IPO’s as there is no stock price data to analyse.
An example of a successful IPO is Twillio Inc (TWLO). The firm is a cloud computing company and the share price was $15 when the company floated in June 2016. On the third day of trading the value of the share increased by 90% and as of December 28th 2016, the share price was up by 101%.
Medium-term trading strategies are for trades which will be held for several weeks.
This strategy revolves around using options. Assets will be carefully and analytically selected,
to invest in with the aim of medium term profit. As a risk-taking team to minimise our losses an option strategy was devised. Once an asset is selected to invest in, a put option will be also purchased. When the value of the asset increases the put option will decrease in value. This will in turn reduce profits. However, if the predictions made are incorrect and the value of the asset falls, the put option will gain value. Therefore, the losses can be minimised and the strategy acts as a barrier to prevent the loss of the entire investment. The position would then be closed when the market indicates that the asset will not increase in value further. If the asset declines, the position will be closed if no significant improvement in its value is indicated.
As well as options and equities mentioned above, investing in indices will also be considered. Indices provide a level of return which match the market. These therefore, would be a good medium-term investment.
Our long-term investments are ones which will be held throughout the term of this coursework and ideally, these investments would be held for several months or years.
Purchasing Government bonds from the UK (United Kingdom) or US Government would produce small, long-term returns. These governments are also extremely unlikely to default in the near future and therefore, make bonds an attractive long-term investment. In addition, on the StockTrak platform, the rated of interest received is 8% per annum on cash balances. As the interest is received daily, it amounts to 0.021% per day. Therefore, leaving a proportion of the fund in the account seems sensible as a small, guaranteed return will be earned each day.
Capital appreciation of equities will also enhance the portfolio in the long term. To select the potential equities to invest in, extensive fundamental analysis will form the basis of the funds decisions. Examination of financial statements, observing news and trends of the industry the equity falls within will form part of the analysis undertaken. To further advocate the investments selected, technical analysis will also be conducted. The equites will be held with the intention of keeping them for the entire duration of the coursework. However, if the equity is underperforming, or it seems it will no longer exceed its value, due to price patterns or news affecting the company, the trade will be exited.
This Hedge fund, due its Actuarial composition, firmly believes in diversifying risk. This can be achieved through investing in many of the above asset classes to minimise exposure to individual risks.
To prevent unreasonable risks being taken, thorough and detailed analysis will be performed, which will consist of both fundamental and technical evaluation.
To prevent the loss of the entire portfolio the option strategy, mentioned previously, will be put in place. Also, investing in liquid assets will enable the exit of a losing trade easily to cap the losses before they reach a critical point.
This investment strategy is flexible. This hedge fund aims to be able to adapt the strategy to changes in market conditions. Also, as the team learns more about investing, strategies may be added to further enhance and strengthen the portfolio.
There are many constraints and obstacles present throughout this coursework that will affect the performance of the portfolio.
The first major constraint affecting the portfolio’s performance is ‘Time’. This is a restriction in 2 aspects:
1. The final day of trading is the 7th April 2017. This results in the fund having approximately two months to trade. Therefore, this will limit the level of return the portfolio can achieve.
2. Alongside this coursework task, as Actuarial Science students, the team will have many other modules to study for, as well as other coursework tasks to complete. It is important for the team to manage its time well to not only excel in this task but in all other modules too. The other projects and modules we undertake may limit the time we available to research investments.
Using the StockTrak trading platform provides its own problems.
• There is a 15-minute delay between the actual price of an asset and the price quoted by StockTrak. This makes it difficult to trade as the price quoted is not the price actually traded at and the value of the portfolio will also be therefore at a 15-minute lag.
• StockTrak also limits the amount trades available to make. The initial limit is 125 (check figure) trades. Therefore, the group will have to be selective about the trades made to ensure the highest level of return is achieved. If needed, however, the limit of trades available to make can be extended.
• The short-term strategies employed can be sometimes impossible to implement as on StockTrak, closing a positon soon after opening it, can sometimes not be an option. Therefore, cashing in on very short term price movements can prove tricky. This constraint restricts the amount of short-term trading the hedge fund can do.
• Options form a key part of the medium-term strategies the team wishes to employ. On StockTrak, options can be in very limited supply for some equities. This is a key issue. If an option is unavailable for a certain equity, executing the option strategy, to minimise losses, may not be a possibility.
• The platform also produces artificial returns. When one hedge fund is the holder of the full amount of a particular future option contract, when calculating alphas and betas, the platform would show that group to have the strongest alpha. Alpha is the main indicator of the “wise” performance of a hedge fund. However, when a second individual would write an option contract identical to ours, the perceived uniqueness of the hedge funds holding would decrease and therefore the return would fall. Thus, the alpha and the return is proved to be artificial.
Trading equities was a popular choice. In the first few days of trading, extensive research was done on many promising companies with the potential to grow, both short and long term. As part of the analysis, historical share prices were reviewed and sudden jumps were researched. Thus, identifying reasons behind sudden changes in share prices of a company.
For example, the release of a new consumer product, filing of a patent, mergers and acquisitions, earnings reports and scandals were prominent reasons for sudden changes in share price. Fundamental analysis was often used as a primary indicator of the company’s credentials. All listed companies are obliged to release financial reports publicly. The company’s statement of financial position, profit/loss statement, income statements and financial ratios were all reviewed to determine the past, present and future health of the company. An intrinsic value for each company was determined via valuation models and allowed for internal ranking of companies before investment decisions were reached.
Varied level of success was achieved using valuation models. They were often basic in nature and didn’t reflect changes in public tastes or attitudes. Technical analysis was used to predict the future direction that a stock would move along. This was a short-term indicator and, thus, was more extensively used when engaging in short term trading or day trading.
The main strategy for equities involved purchasing/selling equities and matching these with the same number of put/call options respectively. Another element to the equities strategy was to scale out of highly profitable positions. Scaling out of positions involved selling a small amount of equities held (if equities were bought) in order to recoup a portion of the initial expense that was incurred when the equities were purchased. This was only done when equities performed extremely well or if investment had been made was highly volatile or into a company that didn’t exhibit confidence. Thus, the position would then be ‘less risky’ to hold as the maximum loss that could be incurred has been reduced. Along with this strategy, it was imperative to ensure that the same number of options and equities were held at all times.
The main trades that best reflect the successes and failures experienced during trading are discussed below.
Apple Inc. (Total Profit $2,637.61)
Apple is listed on the Nasdaq 100 and is one of the largest companies in the world in terms of revenue, total assets and mobile phone manufacture volume . Apple’s product line is hugely popular and has seen its U.S. market share grown by 6.4% year-on-year in the three months ending in November 2016 .
Apple was intended to be a long-term investment as releases of products were approaching fast. After reviewing historical share prices, it was clear that share prices tended to rise in anticipation of new releases and after product availability. This year, for instance, is to mark the 10th anniversary of initial release of Apple Inc’s most iconic and successful product line, - the IPhone.
As such an anticipation was very high, confidence in the company’s ability to perform positively had risen. The strategy implemented involved holding equities and buying a PUT option. The aforementioned tactic has been discussed earlier.
After making over $2000 profit, it was clear that the fundamental and technical analysis employed was successful. Apple equities and options are still held in the portfolio making a profit. Another element to the equities strategy was to scale out of highly profitable positions and this was done to great effect. Through these strategies risk is minimised and allows for further investment.
Amazon (Total Profit $2,637.61)
Amazon is an e-commerce and cloud computing company. They offer a wide range of services and products. They provide an online market place, sell their own manufactured and branded products, streaming services (movie, TV show and music) and delivery infrastructure. The innovation and new products that have been displayed by Amazon coupled with the growth of its Amazon Prime services; retail of its expanding range of artificial intelligence products; drone delivery and a same day delivery have made this investment suitable for the long term.
When making an investment decision, comparisons were carried out between Amazon and similar companies such as Ebay (e-commerce) and Netflix (digital streaming services). Amazon often outperformed earnings per share and revenue forecasts. A similar investment strategy to what was used with Apple was implemented again with Amazon. As this was a long-term investment, the portfolio still holds Amazon equity and options.
Snap (Total Profit $16,398.77)
Snap was among the most highly anticipated initial public offerings in decades. Snap, the parent company of social media giant Snapchat, is a very popular application, with an estimated $158 million daily users as of February 2017 and 2.5 billion snaps sent every day. Despite never having made a profit, there was a lot of excitement among investors and news coverage to match.
We decided to purchase Snap as it was among the most used and most popular social media platform today and due to the great anticipation shown by investors. Snap priced its public offering at $17 per share, however started trading at $24 per share thus rising 41.2% from its pricing at open .
Due to the difficulties experienced with StockTrak, we were unable to purchase any equity till 30 minutes after the release. A total of 16,200 shares were bought at a market value of around $400,000. We managed to enter at $24.73 and $24.91 per share and slowly scaled out of wining positions, selling for as low as $24.98 to $29.07 per share. Scaling put of positions allowed us to maximise our returns and protect us from adverse incidents that may occur. This was an example of day trading, as we entered and exited from all positions in Snap in the space of a day.
Ciber Inc. (Total Profit $22,797.00)
Ciber is a global information technology company that specialises in consulting, services and outsourcing. Despite Ciber being unknown to us, it caught our attention as it was listed among the ‘biggest movers’ when checking for financial information from our many sources. After further investigation, we found out that Ameri Holdings had offered to merge with Ciber .
The offer valued Ciber at $0.75 per share when Ciber had opened trading at $0.50 on 13th March 2017. After reviewing technical indicators, we were confident enough to place an investment to buy equity in Ciber. We predicted that the share price will rise close to the offered amount $0.75 per share from Ameri Holdings. We were right with our predictions and entered the trade at $0.48 per share, buying 300,000 shares. Then, we began scaling out of positions, thus selling all 300,000 shares as low as $0.49 to $0.60 per share. The highest the share price reached that day was $0.65 and it closed at $0.58 per share. This is an example of opportunistic investing. We entered and exited every position within 30 minutes, thus taking day trading and short term trading to new extremes.
The most unsuccessful investments endured all occurred in the time span of a few days and included companies: Pulse Biosciences, Buckle Inc, Catalyst Pharmaceuticals and NII Holdings.
Buckle Inc (Total Loss -$17,500)
Buckle is an American clothing stores company. We came to a decision to short Buckle after reviewing its financial statements. Buckle Inc. revenues decreased 13% to $974.9M. Net income decreased 33% to $98M. Revenues reflect Retail Sales decrease of 14% to $875.1M, Online Sales decrease of 5% to $99.8M and Sales decrease of 13% to $1.08B .
This was enough reason for us to short Buckle, which proved to be a mistake as share prices increased on the day of the release of the financial information. This may have been due to dividend per share increase from $0.94 to $1.00 and earnings per share of $0.74, exceeding forecasts of $0.34 per share. This was a heavy defeat as earlier trades based purely on fundamental analysis were successfully traded with profits.
Pulse Biosciences (Total Loss -$13,357)
After reviewing technical indicators, we entered this trade and quickly began making losses. Eventually we sold our shares in the company for a loss as to not incur further losses. This proved to be a mistake as days later the share price rose by 30%.
NII Holdings (Total Loss -$12,500) and Catalyst Pharmaceuticals Inc. (Total Loss -$17,000)
Immediately after suffering a loss of $13,357, we invested in NII Holdings and Catalyst Pharmaceuticals soon after. These trades have all the hallmarks of a panic purchases as our portfolio value tumbled. The careful planning and research that had gone into our previous trades had been abandoned as we looked to make up the money lost from poor trades as quick as possible.
After suffering losses exceeding $60,000 in the space of 5 days, we decided to close most of our equity positions and looked to start the process of investing afresh, going back to the strategies that had served us well in the past.
Indices measure the value of a particular segment of the stock market. They comprise of a selection of securities and are a means of indication to market performance. An example of US indices are the Nasdaq, S&P 500 and the Dow Jones Industrial Index. These measure the performance of certain sectors of the US market.
Indices can be used to as a hedging tool and would be purchased to eliminate market risk. Indices can be used to hedge a portfolio of equities in order to eliminate market risk. They can also be used to speculate on events that would externally impact the entire market the index covers. For example, if an investor is expecting a bullish market, in partnership with their long positions, they could short the index to hedge market risk. This fund mainly focused on the US market.
S&P, Nasdaq, Dow Jones
A successful index traded by the fund is the S&P 500. This index tracks the 500 largest companies in the US. Prior to trading it had displayed a strong performance. This performance may be a result of certain factors which influenced the US market.
Donald Trump had recently been elected the President of the United States. Being very pro-business President Trump heavily deregulated certain industries, giving business more flexibility in their operations. This in turn translates to higher profits and thus results in a stronger performing index, which was apparent during the period Feb 2017 to mid-March 2017.
The strong performance in February was partially as a result of a combination of speculation on firms’ earnings-releases which were approaching within the index. Each individual equity would have some impact on the performance of the whole index). Once earnings come out the shares would be re-valued to reflect the performance of the firm given the new earnings reports. If earnings are bad overall it would be expected that the value of the index would decrease.
On Wed-15th march US federal interest rates were also raised from 0.5% to 0.75%. This would cause deflationary pressure on the value of equities due to the increase in opportunity cost of holding gilts. Also, increases in the cost of borrowing for firms, would in turn reduce their profits. It also causes an increase in the interest rates used when valuing the equities which leads to a lower present value and could be part of the explanation for why US indices did not continue to perform well.
Some exchange-traded-funds (ETF’s) were used in order to take advantage of the derivatives available. One such fund was SPX which tracks the S&P500 index. Without using ETFs and their options it was not possible to write options on the S&P500 due to the limitations of the platform. By using the SPX ETF, we were able to write options on day we did not expect a large market movement as we know that on such a day the daily returns are distributed symmetrically about the mean. An option expiring the same day on the SPX was sold on such a day in order to obtain the time value that was left. This strategy required actively checking the position to make sure that the share price did not adversely move against us. It would have also been possible to write the options on equities we already owned as a way of managing the risk. Overall this was a successful strategy however it was necessary to exit the options trade before expiry and not to just allow the options to expire.
Index Futures were also used and these are useful as they are leveraged positions. The futures can be used to provide a risk-free return. If the future price (F) is less than the spot price (S) then a trader could go long on the future price and agree to buy the underlying asset at F, whilst simultaneously shorting the underlying asset directly thereby agreeing to sell the asset for S. The profit would be a predetermined S-F at the date of delivery. The futures price being below the spot price is an example of backwardation. Backwardation in the S&P500 which was observed during the month of Feb-Mar2017 can be explained because interest rates have dropped to near zero levels, while dividend pay-out ratios have risen, thus resulting in backwardation of S&P500 futures. To give a specific example - presently expected dividend yield is 2.27%, while one year interest rate is 0.32%. You would therefore expect, for example, a 1 year to maturity future to be roughly 1.42% below spot prices - i.e. to be in backwardation.
Commodities is a very wide and volatile class of investment and trading assets. The main features of the instruments are that, first of all, commodities are consumption assets that are highly influenced by the laws of supply and demand. In addition to the systematic risks, commodities bear idiosyncratic, operational and transportation risks. Consequently, the returns that are possible to be achieved in the commodities markets are also relatively higher compared to, for example, equity and bond markets.
Initially, we were not going to trade on commodities. The reason was that we, firstly, did not know the instruments well and, secondly, we did not want to rely on high degree of volatility (i.e., relying on achieving a higher beta than alpha for the CAPM of our portfolio).
However, it was clear that a trading opportunity in the face of a short position was available. A thorough discussion was undertaken before opening a short position in gold. It was bouncing in the 1200 (approx.) area and we had already benefited from shorting it at the beginning of that week (week of 9/3/2017) at a price of 1205 (approx.) on a side trading demo platform account.
Three PUT future option trades at strikes of 1200 and 1195 with April expiry were placed. After the first night of putting these trades, we were at an approximately $10,000 profit. This led to a decision to increase the exposure to gold, after which gold’s trend sharply reversed to a bullish line, going all the way up to $1265 till 7/4/2017. Analysis of what went right and went wrong to be carried in the Evaluation part.
After that, a strong caution with respect to going into commodities appeared and it was decided to stay away from it, reversing to the initial strategy plan. However, when the portfolio got severely damaged by unsuccessful earnings speculations with the overbought Pulse Biosciences Plc equity, the return of the portfolio fell to roughly -3%. This resulted in desperate actions to be undertaken in order to recover the initial success. We opened a long position this time and the investment appeared to be profitable.
Since that time, we fully went into recovering our portfolio by focusing on commodities. The equity selection was also fully redrawn in order to at least slightly keep our initial long term strategy in power. Nevertheless, gold appeared to be the ultimate saviour of the return and within two or three weeks we were able to get to the first position in rankings again – from a loss of 3% to a gain of 8+%.
We stirred away from our initial strategy of precise fundamental analysis and delicate technical analysis, to full chart-pattern technical analysis with injections of news trading. This time it was not an option to be process-oriented by sacrificing profitable momentums and flexibility of our portfolio.
Our best friends became the supports and resistances, Fibonacci retracements, trend patterns, candlesticks and news. If the price of gold, for example, could break the resistance of $1254, we could at that time as well expect it to go all the way up to $1280. However, it the resistance could not be broken, the retracement tool would show that gold could easily drop to $1240.
In this way, consistently looking at the charts and observing data releases, we were step-by-step recovering our portfolio and making it even better. As the knowledge and experience of gold trading increased over time, other commodities started occupying a trading focus too. We started trading Brent Crude oil futures.
The problem of artificial return has been mentioned already in the constraints part and now we are going to look at it in a more detail. When the Brent Oil trend was analysed, a realisation took place that it was a good time go long. The pattern formed a double bottom with a possible Fibonacci retracement, following the 2618-strategy by Jason Stapleton. It was a time to enter and the full capacity of CALL future option contracts that was available on the market was purchased. In other words, we went long of the maximum volume available, effectively becoming the main holders of a unique contract. This led our portfolio value to skyrocket to 17%, which is observable on the performance charts of the portfolio below:
The graph above shows the highlight of our maximum return achieved as a result of uniqueness of the Brent Crude Oil Call future option contracts we held.
Interestingly, it should be noticed that even though the portfolio mostly traded on commodity such as gold, the overall performance looked very alike to the performance of Oil ETF:
It was difficult and nerve-taking to keep the portfolio within the conditions of uncertainty as to where did the artificially high return come from. Our rankings in terms of Sharpe’s Ratio and Alpha & Beta were the first among other groups too. This led us wonder if the return was actually produced because of high alpha, rather than because of simple uniqueness of the contracts we held.
Eventually, however, the return stabilised and decreased to 7%, which ultimately showed that the StockTrak platform is, perhaps, the least user-friendly tool with which trading could be learnt on.
Food & Fibres
More commodities were to be discovered. A valid website, NewsNow.co.uk, was found, which would list the headings of news appearing for each industry sector. It was also discovered that Sugar #11 was a great commodity to trade with due to its excessive volatility. The first future contract on Sugar #11 was opened on 31st March 2017, being a short contract for a quantity of 100 futures. The way it was decided to trade sugar was, first of all, based on chart analysis. We did not even go into news research.
It was rather an inductive method, in which chart pattern would be analysed, and then, the fundamental research would be taken in order to build up the whole picture of what and for what reason happened. This was a completely different to our initial strategy tactic, and it paid off greatly.
Nearly every heading on the NewsNow for sugar on 31st March has been praising good production outcomes, and this led us to expect a potential decrease in the price of #11 futures as a result of the simple supply and demand force. The higher is the supply, the larger is the producer surplus, leading the market force to correct it by reducing the price down to the level of the market equilibrium. Looking at the history of our sugar trades, we were acting as bears consistently, shorting sugar contracts all the time. Because sugar is so volatile, we would go short even if we could see that it might rise. This would supress the margin to a great extent, and push the portfolio down in the rankings, but eventually the price would fall down, making a profit. At the same time, because there are so many countries producing sugar, food & fibre commodity price would be affected by a greater array of movers compared to metals such as gold. These crucial clues are to be elaborated more in the Evaluation part of this report.
Sugar was not the very last stop, however. Our current portfolio selection of futures consists of soybeans, corn, sugar, wheat. These are the settled food & fibers commodities that we got relatively experienced at analysing chart patterns of and reconciling the patterns with the news headers. Simplest support and resistance observation so far allowed to achieve profit at these positions. Moreover, the wide selection of different food & fibers created a reasonable hedge for the portfolio, since clearly it is very unlikely, albeit possible, that all the positions will start producing loss at the same time and in a consistent manner.
Natural Gas & Copper
Apart from gold, oil and food & fibers, we went trading natural gas and copper. These two instruments were objectively speculated on by using news as a justification only. What is more, news played rather a triggering role for us to go for natural gas and copper. Since our group consists of people from different countries, international advantages could be exploited.
In such a way, for example, it was spotted that revenues of Russia from producing and exporting electro-energy decreased 8.3% in February , while exports revenue of Natural Gas increased by 23% within the period from January to February 2017. Whilst any clear divergences on the RSI and any clear trends for MACDs could not be clearly remarked, a judgement was used that even though the trend is bullish, there should be a short-term retracement. For a 5-minute time frame it was possible for gas to fall and we shorted it, making a profit. This, however, not something that is considered a right action, because the trades of natural gas looked more of a bearish-bet nature, rather than cold-blooded investment. The issue of natural gas will be touched briefly in the Evaluation part.
As for the copper, opening the position was a fully news-based trading. As soon the NewsNow headings claiming that copper was about to jump were observed, a respective position was opened straight away, after which a following jump in copper futures occurred:
The blue star on the chart above represents the level of price at which we opened the position. It can be seen how profitable a fast reaction to news appeared to be. Breaking the previous support-resistance at $2.610 meant that new resistances were to be broken in the future. After the sharp increase, we can also observe the 2618-pattern. There is a double top price pattern followed by a slight retracement at 6 o’clock, leading to even greater decrease in the price. This means that it is time to short copper.
The reason for such a jump was the arousal of Chinese market, which generally has a great influence on copper. All this happened due to the US President Donald Trump meeting the Chinese President Xi Jinping and due to a sequence of other factors, which will be looked more deeply at in the Evaluation of this report.
“Econometric models work well, until they don’t…”
As we have already pointed out, our main strategy for equities was a long-term investing using protective puts in case of fall in price and to limit our downsides. We were not only going for long position, often going short on equities such our recent short positions on Goldman Sachs as of 3/21/2017. It was learned that speculating on earnings releases is dangerous. We overtraded on Buckle Inc. – the equity that resulted in falling from the first position in rankings for the first time. Within one day, nearly $50,000 was lost, which also included the unsuccessful exposure to gold increase that has been mentioned earlier in the Commodities Conduct part. The situation with Buckle was rather a human factor mistake. We got overconfident in our own expectations on how the earnings would affect the equity price, at the same time not carrying out enough research into the earnings releases.
That is why, when we saw that earnings appeared to be worse than expected, we went shorting Buckle, while in fact it jumped as a result of earnings per share data being better than forecasted. In other words, we allowed ourselves to be ill-responsible about the thorough fundamental research that we wanted to follow in our initial strategy. We did not go to consider the possible effects of earnings per share and the correlation between the latter and the gross earnings. Consequently, we got severely punished for that by ourselves.
This clearly showed two things: firstly, if you are fully confident in your initial approach, then you should follow it consistently; secondly, if you stopped following your initial strategy consistently, then your initial strategy is no more valid to you.
Whilst in fact it was rather our own psychological fault, it was clear that even if we would be able to avoid becoming overconfident and greedy in the future, the strategy was not sufficient anymore. By saying that, we mean that our strategy was not anymore “enough” for the increasing pace of our personal trading and gaining skill. This led us to ultimately conclude that there is no consistent long-term strategy for trading that would be sustainable within the conditions of a trader himself evolving and being able to take increasing pressure of the market.
Perhaps, this is the real meaning of John Maynard Keynes quote: “Econometric models work well, until they don’t”. The models stop working not because they are designed in a “bad” way, but rather because the human brain is capable of consistent development, resulting in evolution of market behaviour and, as a result, impairment of current methods.
In addition, many equity valuation models were not sophisticated enough. They were obtained from the internet and we, consequently, had varying success using them.
It is also important to mention that we attempted trading on IPOs. The ultimate conclusion for IPOs is: whether you will be able to make more from it or not will depend on the company going public itself. On a day of Snap IPO we made amazing gains just because of the popularity of the SnapChat application and just because we knew what it was about.
At the same time, on similar IPOs such as MuleSoft, Alteryx, KayneAnderson Acquisition, etc. we could not benefit to the same extent from desired overbought trends. This is why we consider IPOs as a one-in-thousand lucrative opportunity.
It is also important to note that IPOs are quite risky, since there is no chart history available for the company. Nothing works with IPOs: neither supports or resistances, nor the fact that the market has a memory for its values and that market history repeats itself due to the demographical structure and behavioural psychology of the trading population focused on a given trading instrument.
Purchasing an equity and an option proved to be a successful strategy for most of our trades. However, this was not always implemented as well as it could have been. For example, purchasing the ‘right’ put option for our situation was often a difficult task, with availability (volume being traded), pricing and expiration among the many factors to consider.
On a few occasions, the ‘incorrect’ option (call/put) was purchased. This option either expired too early or its strike price was too high/low meaning the losses experienced from the option outweighed the gains made from buying/shorting the equity. Thus, losses were made from such an investment. Factors, affecting the price of options, were then studied in greater detail to avoid similar mishaps from occurring.
There was a great deal of emotional side of unsuccessful trading. After experiencing losses in Pulse, we suddenly panicked and sold everything. However, share prices would go on to rise by roughly 30% over the course of the next week. In other words, we sold too early, albeit it was objectively difficult to predict a potential rise afterwards. The same panicking happened with other equities too. After becoming unsuccessful with Buckle, and then getting hit by Pulse, we additionally panicked into NII holdings (13th March) and CatPharm (15th march).
Nevertheless, the passive equity investment strategy is still valid. Whilst active trading with equities appeared to be our weak area, the long-term investment along with protective puts is still employed. This is because our new selection of equities consists of trustworthy and stable companies with a durable competitive advantage. The last term used is the philosophy of Warren Buffet, who’s fundamental model of financial statement analysis we used.
To put it simple, if a company with durable competitive advantage is found, then the investment into this equity effectively becomes a long-term corporate bond with unlimitedly increasing return. Considering the fact that we are using protective put strategy to limit our downside, we have a situation, in which we limit our downside risk, but at the same time, enter a position giving us an unlimitedly increasing return.
Indices helped hedge equity positions and speculate on movements of the prices of the Dow Jones, S&P500, Nasdaq. Indices were used to speculate on economic events such as a speech by President Trump and the impact of his policies on businesses. Furthermore, the indices acted as a source of diversified risk as they are made up of combinations of equities.
“When the facts change, I change my mind…”
The above quote of John Maynard Keynes is one of the first lessons we learnt when touching commodities. As it was already mentioned, we benefited from our initial acquaintance with gold, but we lost because of overtrading. In other words, the problem was produced by basic trading greediness.
Reasoning behind Gold trends
What is more interesting is the reason gold started to rise. Our first gold trade was placed not only because we believed that we were losing the momentum, but because we relied so much on conventional laws of macroeconomics. To be more precise, we relied only on certain aspects of macroeconomic cause-and-effects.
The reasoning was in the following: “We are expecting an Interest Rate Decision to be announced next Wednesday by the Federal Reserve in the US. We are more than 70% sure that the interest rate hikes will be employed to tackle the booming GDP of the US, which was present since the election of pro-business Donald Trump. Interest Rate hike is likely to: first of all, represent stronger aggregate demand and stronger consumer confidence; secondly, to make the US government bonds more attractive by offering higher yield…”.
Our reasoning was right from a logical perspective. The two possible consequences of interest rate hikes made us believe that the US-dollar would become stronger because of greater confidence and because of appreciation of US-currency against domestic currencies of upcoming government bond foreign direct investors. Stronger dollar would mean that the price of gold decreases, because gold has always acted as a safe haven against relying on the US currency and on the US economy in general. Therefore, we believed that gold could drop even below $1185 and it was the time to short it.
However, when the interest rate decision to increase interest rates was announced, the numerical figures of gold quotes started making a bullish dance. We observed how the quotes became abnormal and an anomalous movement of quotes followed; as the Fed Chair Janet Yellen was speaking at that moment. The figure of $1219 per ounce already looked unusual, but the chart did not show changing of its mind. Gold skyrocketed.
Gold, Currency Pairs and Hedging
It is important to point out that there was another lesson to be learnt: never short a bullish trend. Many of the trades we have been placing with gold were the result of us accepting the fact that we cannot overplay the market no matter how large our stamina in terms of margins and inter-group competition is. By accepting this moment and stepping over our pride, we started “swimming in the main direction”, rather than taking a nihilist stance. As a result of this simple understanding, we are the best performing group now.
Moving back to gold discussion, another important phenomenon was learnt. The USD/Japanese Yen currency spot moves in a very strong negative correlation to gold. In other words, there is a room for additional hedging using a variety of instruments, rather than focusing on only one instrument. It is also strange that whilst gold and the UJ currency spot act like opposites to each other, the US Dollar Federal Index futures might be increasing along with gold.
As we have already said, strength of dollar is in negative relationship with gold. However, right now we are holding both profiting us gold future options at strikes of $1240, $1250, $1255 and the FINEX USD Index future, the latter producing $14,000 of gain. Initially, the future options were opened for the sake of hedging against the US Dollar Index futures, but right now both positions are profitable, meaning that there is indeed a much deeper and mysterious relationship between the USD and gold. It is also debatable that the US Dollar index is rather a basket of non-US currencies and the extent to which the US market certainty influences it might be difficult to evaluate.
Nevertheless, as for us, ordinary traders seeking profit maximising, the initial picture of negative correlation between gold and the USD is enough to make reasonable amounts of cash, assuming we trade only on gold and on USD/Japanese Yen instruments. Just as the way gold is related to the USD/YEN, crude oil is related to GBP/CAD. Moreover, there is a 93% negative correlation between oil and GBP/CAD. These important relationships between commodities and currencies are everywhere, which makes the commodity market one of the best areas to trade.
Donald Trump and Gold
Whilst we have been using technical analysis as our main aid of dealing with commodities, fundamentals and news were those that triggered us to observe entry and exit points. Within the last two days (4/6/2017-4/8/2017), gold has jumped up and down by nearly $10. This happened alone because of the US attack on Syria after the usage of chemical weapons in Syria. We have been holding gold CALL future options since the time gold was bouncing in $1245 - $1250 area and within one night we saw gold becoming $1265. Despite the fact that gold is down to $1255 right now, it might as well be heading to $1300 by the end of the current month. And a single reason being for that is Donald Trump.
Not only his aggressive stance on foreign and immigration policy, but his overall approach to market makes us expect gold to rise while he is in the government. The interest rate hikes appeared to be bad for USD by supressing demand-pull inflation. President Trump is aiming at weakening the dollar to make the US exports cheaper and stimulate domestic business.
In other words, no matter whether the Federal Reserve acts along the President, or whether the latter faces high levels of resistance, everything right now is keen on damaging dollar. The reasons might vary however: either the US economy is doing well in terms of businesses, or either there is a political pressure on the president, gold is on a bullish trend. Recall one of many important lessons we learnt so far: never short a bullish trend.
This is enough for us to understand to make money out of current situation and the real reasons as to why we are making money should not be of primary importance. Not because we are so profit-maximisation focused, but because within the current pace of market and globalist development, the ordinary approach appears to be more of a process-oriented and theoretical nature, rather than something that would allow to apply our knowledge in field work.
Natural Gas lessons
At the same time, it is still important to hold consistency in terms of looking at the charts first and only after that – placing a trade. The ill-responsible bet on Natural Gas bullish retracement was one of those situations, in which it is possible to profit even if an invalid action is undertaken. As we have mentioned in the Conduct part, the revenues from exporting natural gas for Russia were up 23%. This, first of all, meant higher demand for natural gas, not higher supply.
This is a simple rule of economics: demand produces supply. In other words, it was pretty much clear that natural gas is likely to rise. However, because there is always some kind of resistance (or support) to bullish (or bearish) trend, we shorted natural gas by looking at a 5-minute time frame chart. This led us to gain from that trade, but this certainly did not mean we did something right. Or at least right in the meaning of looking for lower risks.
This situation showed two crucial points. First: whilst actions, fundamentals and strategies are human-based, the markets are real. Sometimes it does not at all matter if a “right” or a “wrong” thing is done – it is possible both to lose or to gain just because the way things are. The complexity of market forces very often reaches a level of randomness of a stochastic process. This is the reason why so many fundamentalists are still keen on using the Portfolio Theory, which is based on Simple Random Walk models. We, in our turn, remember that “…econometric models [indeed] work well, until they don’t…”.
The second thing we learned with natural gas was a personal discovery. A positive personal discovery, in particular. Just the fact itself that we consciously recognised that we did not do something “right”, but still profited from it showed that we became much more mature in terms of “feeling” the market and approaching it as a self-sufficient organism. A novice would simply look at the profits and any time they make a profit, they would consider their actions correct by definition. We, in our turn, think deeper. Because now we are better traders than we were initially.
StockTrak vs. Group 1
“You will not always have everything that you need. Learn to work within what you have right now…”
Not only Stocktrak as a platform, but the rules of the trading game were interfering with our trading activity. The initial limit of number of trades was 250. This figure was reached within the first two weeks of trading. The equity position in the ‘Boeing Company’ that was opened is an example where scaling out of the position to make profits was the best strategy. However, the position proved to be making losses and there was no point in holding it. The position could not be closed as the number of maximum trades had been reached. Thus, the position remained open and we became mere spectators as the loss-making position was eating our return and ranking position.
After hitting the maximum number of trades, 600, requests for additional trades began yet again. We have requested to increase our trading allowance three times so far: when we hit 250, 300 and 600. Just recently, a similar problem to the ‘Boeing situation’ appeared again, but this time with commodity trades. What is more, this is exactly the glorious copper trade that we got so lucky with. We entered a long copper position at $2.644 and watched it jumped to $2.690, we have lost our target profit momentum because we could not trade anymore. Due to the fact that our commodity futures selection along with the US Dollar Index future is so nicely hedged right now, we are still able to hold on to the top position in the rankings. Nevertheless, if we had not run out of trades, we would have scaled out of profitable positions within the same night and, thus, stabilize our return completely and ultimately.
Furthermore, the StockTrak platform has been confusing in areas such as the aforementioned artificial high returns on the Brent Crude Oil CALL Future Option. This was the result of us holding the full capacity of unique contracts. Whilst such a case is very possible in the real trading market, the apparent drawback of StockTrak was calculating alphas and betas based on artificial returns and deceiving us on our perceived 17% portfolio return. Rather, we needed to expect the anomaly to stabilize. This caused lots of stress and tension over holding the positions at that moment of time.
In addition to StockTrak compelling us to make wrong decisions, our own lack of knowledge and human errors lead us to lose money. For example, we were keen on investing into Warren Buffett’s Berkshire Hathaway. However, the StockTrak equity market had several Berkshire Hathaway instruments, all of which appeared to be different to each other. Due to this, we invested into Berkshire Hathaway B instead of Berkshire Hathaway A and amusingly started losing money on the B position, while observing a booming price of A. Eventually, we stopped our loss and scaled out of the position without making any profit from the trade.
Conclusions – SWOT Analysis
• Diversity of personalities
• Genuine enthusiasm
• Punctuality of team
• Confidence in success
• Relative number of trades
• Experience at dealing with technical constraints
• Conjunction of Technical and Fundamental approach
• Flexibility of strategy and philosophy
• Efficiency of interaction
• Actuarial knowledge; risk management and modelling
• Relative numerical and mathematical superiority
• Relative superiority of IT knowledge
• Ability to report
• Ability to reconcile information, knowledge and actions
• Improved basic and intermediate understanding of trading and investing techniques
• Improvement on dealing with spot and futures markets
• Major improvement on the array of trading and investment instruments used
• Major improvement on dealing with the trading platform
• Overall degree of relative trading and investment experience achieved over the trading game
• Excessive debating
• Human factor
• Likelihood of excessive focus on details
• Excessive reliance on individual members of team
• Presence of inefficient trades
• Loss of entry and exit momentums
• Initial excessive reliance on Fundamental analysis
• Geographical location of individual members
• Original Actuarial background: Lack of knowledge of the Portfolio Theory and specific investment and trading operations
• Different levels of knowledge of Derivative Markets among individual members
• Uneven distribution of workload conditioned on different time periods of trading game
• Avoidance of new and unexplored trading and investment instruments
• Lack of deep experience in managing bonds, mutual funds, indices and emerging market instruments
• Excessive focus on single “Protective Put” strategy
• Opportunity cost of time and energy inputs against other academic modules
• Exploration of accelerating globalisation and consequent trading opportunities
• Further exploration of relationships between commodity instruments and currency pairs
• Exploration of emerging markets
• Tighter exploration of indices
• Invention of more sophisticated arbitrage, hedging and speculative strategies
• Further deepening of Technical Analysis knowledge
• Observation of technological advancement
• Further exploration of IPOs
• Increasing attention to software markets
• Further research into seasonal behaviour of markets
• Further research into demographical and behavioural nature of trading population conditioned on the given instrument and market
• Further strengthening of Mind and Method Threats:
• Historically abnormal number of global geopolitical and macroeconomic movements
• Increasing uncertainty
• Threat of potentially high losses arising from a current rise of systematic risk fluctuations
• Threat of potentially high short term gains as a result of higher volatility, resulting in invalid assumptions about trading tactics
• Threat of interpersonal conflicts and conflicts of interests among the members of the team
• Human factor
• Threat of excessive opportunism in relation to IPOs
• Threat of further losses of momentums as a result of rigid vectors of trading focus
• Possibility of excessive flexibility of trading strategy, resulting in inefficiency
• Presence of high input opportunity costs
• Lack of focus on Money Management in favour of Mind and Method
Final words and recommendations
The trading game finished on 7th April 2017. First position in group rankings, the largest number of trades made and most crucially, the greatest experience of trading and investment have been achieved over the two-month Alternative Investment Management coursework.
The SWOT Analysis in the beginning of the Conclusions section indicates the summary of the pros and cons that were observed with respect to the group performance, interaction with the trading platform and essential experience of trading and investment. A non-indicative list of opportunities and threats is also included. The summary for the “OT” section of the SWOT analysis is non-indicative because of the essential nature of trading and investment industries. The most important points that are observable from the retrospective of the group’s performance over the trading game are there. However, it is not a surprising news that in the field of Alternative Investment Management, there is a lot more yet to be discovered and revealed.
The most important lesson learnt by us is by far the fact that the area of trading and investment does not have a limited upside in terms of “knowledge returns”. In other words, the more information is learnt and the more experience of trading is gained, the more there is to be discovered further. At the same time, whilst investment can indeed be designed for ordinary people that are not planning to plunge into the depths of investment industries and studies, trading is an objectively different area of conduct.
We believe that we managed to conquer the very first several steps to become “good traders”. We have improved heavily on our 3-M Framework. Firstly, our Method has been initially designed with a great attention and precision. As the trading game went on, the trading strategy and philosophy were improved on. New brave actions such as going into earnings trading, exploring Commodity and Currency markets, changing focus from Fundamental to Technical analysis were undertaken. Some of the actions appeared to be unsuccessful, others – became one of the most profitable and rewarding decisions. In one or another way, our Method has evolved along with us, becoming more and more sharp, result-oriented and down-to-earth.
Our Money Management was carried out cautiously initially, but the shocks that the portfolio experienced because of the improvement of Method led to desperate actions to be taken. Nevertheless, as soon as the portfolio was recovered, we increased diversification of risk by building up an intra-counter reacting selection of Commodity futures. The StockTrak platform, at the same time, did not allow us to completely forget about money management during the period of recovering the portfolio, since the maximum investment into a single instrument would have to be less than 25% of the initial portfolio value. After the return stabilised, a rough double-sided quota per a neutral equity would be around £30,000. A neutral commodity position quota, in turn, would be higher - £60,000, due to the change of instrument focus as a result of lessons learnt about our Method. “Neutral” here is meant a position in which we either did not have enough confidence with respect to the direction of trend, or in which there was not enough of Fundamental triggers such as news and releases.
The last, but not least “M” of the 3-M Framework was also the area of high achievements. Our Mind sharpened even more than our Method. We were punished for being too risk-taking, too risk-averse, too indecisive, or, in contrast, way too brave. The main point here is to understand the importance of moderation. Perhaps, the word “Moderation” deserves to become the 4th M of the current 3-M Framework. This is because even if the Mind of a good trader is sharp and emotionless, there is still a great deal of the human factor threat. The only way this human factor issue can be cushioned is managing the degrees of involvement into each instrument and trade, rebalancing focus and, at the same time, maintaining the vital enthusiasm that acts as the main inner fire of any trader. We, in our turn, believe that our trading Mind has overcome several side-effects of the mentioned “fire of enthusiasm”. A more rigid, emotionless and stoical stance on trading and investment, along with the experience of making great gains and experiencing upsetting losses, makes us feel that we have not only learnt technical and administrative lessons, but have become more wise and strong mentally. There is, as has been said, a great deal of more yet to be learned. Ultimately, we are humans in the first place, not traders. Nevertheless, the problems and issues we have survived as a group prove that we are no worse, if not better, than any other trader.
Recommendations for future AIM trading groups
Our final and the most important recommendation for those groups that will be participating in this coursework in future years is, therefore, in the following:
No matter, whether you do, or you do not have a trading background. Whether the members of your group share similar, or different interests and emotions. Whether the markets are excessively volatile and whether you initially start with great gains, or with large losses…The most important thing - is your own enthusiasm, the inner fire that will help you move along the difficult, but yet unlimitedly rewardable trading path. Conditioned on enthusiasm, anyone can become a “good trader”. So, we will.