Ramblings of a Systematic Trader

My Social Trading Adventure on eToro

2023-07-06T05:13:00.003-07:00

Social trading is not new. One of the first social trading platforms was launched as early as 2003 by Collective2. But eToro made social trading go mainstream in 2010 with its user-friendly platform.

Those who are not familiar with social trading platforms just need to know that they operate just like any other broker. But in addition, they allow clients to observe the trading performance of their peers and expert traders. The clients can choose to copy or mirror any of the traders if they like what they see. Traders are incentivized to gain copiers by getting paid if they meet certain criteria such as crossing over certain assets under management (AUM) threshold.

Other non-trading platforms allow traders to link up their brokerage accounts so that their track record is open to the public. I have been following such platforms for quite a long time. Unfortunately, many platforms have failed along the way due to their inability to monetize their business models. One of the most well-known platforms that have come and gone is Quantopian. Another well-known platform that is still around is FundSeeder.

Although I've known about eToro for a long time, I only opened an account in June last year. I blame it on inertia and the fact that I'm very comfortable with Interactive Brokers. However, after one year on eToro, I regret not starting earlier. Anyway, here's what I've learned about social trading.

Individuals can own their track record

Before social trading came along, the only way to build a verifiable track record is to hire an auditor and audit your broker statements. Unless you are managing millions, it does not make financial sense to pay for an audit. Furthermore, even with a proper audit, few would acknowledge an individual track record.

With social trading, the platform is keeping track of individual performance in a standardized way. There is little doubt that the performance is legit, provided the platform calculates performance correctly. The platform is public so you do not have to go around showing your performance. Whoever is interested can just go in and see. For the first time, individuals can own their track record.

There's still room for manipulation

I can't speak for other platforms but based on what I see on eToro, performance statistics can be manipulated. For example, the way eToro calculates monthly performance is to assume all cash inflows took place at the beginning of the month. This means that a trader can "reduce" his monthly % gain/loss by injecting cash just before the end of the month.

Thankfully, there are ways to spot such behavior by looking at other performance statistics like the equity curve. If there are no cashflows or all cashflows are done on the 1st day of every month, then all the performance statistics should be accurate. However, the point remains that it is contingent upon the potential copier's ability to spot any manipulation.

Social is a big part of Social Trading

Having strong performance is great but it does not automatically translate into gaining copiers. If you are thinking that you can gather large AUM simply because you are a trading god, you cannot be more wrong. Some traders have mediocre performance but they managed to attract a lot of copiers because their social posts strike a chord with their audience. The retail crowd operates more with emotions rather than stone-cold logic.

The saving grace is that those who ultimately gather the most copiers and have more staying power are still generally the ones that deliver good long-term investing performance.

A good source of market sentiment

As a client on eToro, you can see how the other traders are positioned by looking at their portfolio holdings. You can also see posts written by traders and their copiers. This will give you a sense of market sentiment, whether more are feeling bullish or bearish. While other forums like Reddit and Twitter can also give market sentiment signals, nothing beats what traders are actually doing with their portfolios. As the saying goes, "Watch what people do, not what they say".

I do not use sentiment signals myself but I can see how AI can tap into this alternative source of data.

Conclusion

Social trading is here to stay. The top traders are not your fly-by-night operators. Their investment philosophies and approaches can be different but they are all operating responsibly towards their copiers. The only issue is key-man risk but this can be resolved by diversifying among many traders. Social trading is still at an early stage of disrupting the asset management industry but the potential is there. This is not unlike the disruptions in other industries by the internet such as social media and e-commerce. You can follow my eToro journey or copy my trades using the link below.

https://etoro.tw/3JF2pgb

My first-year track record on eToro

AllQuant Website Launch

2021-06-10T06:24:00.001-07:00

After months of hard work, I'm pleased to announce that AllQuant has its very own website. The homepage link is here.

https://www.allquant.co/

The objective of the website is to consolidate all of AllQuant's services in one place. With the website, all our efforts over the past year are now looking more cohesive and sensible. So let me go ahead and introduce what AllQuant has to offer.

Education

This is the service we started with. We set out to educate retail investors on what quantitative investing is about. We do not just cover theory. We teach practical stuff that works in the real world. In fact, after our strategy courses, you would have a complete model that you can implement immediately for your own portfolio.

https://www.allquant.co/investment-courses

Customization

We received a number of requests from students who enrolled in our courses to include or change some of the securities used in the strategies we teach. This led us to create our second service which is to help clients customize their own risk parity or trend-following portfolios. These two strategies are among the most resilient hedge fund strategies out there and they are most suitable for customization. Clients who have their own idea of what US securities they want to include in their portfolios can use this service.

https://www.allquant.co/investment-portfolio-customization

Outsourcing

We have an "auto-pilot" solution for busy clients who want to outsource their portfolios to professionals. For this service, AllQuant acts as an introducer to iFAST Global Markets. Clients can open an advisory account with iFAST and the registered investment advisor would implement the specially curated quantitative strategies for the clients using AllQuant's model portfolios. At the moment, iFAST is unable to accept US tax-paying clients so this service is only available to non-US taxpayers.

https://www.allquant.co/portfolio-management-outsourcing

Last but not least, I would like to add that we also have a blog on our website. Here's our inaugural blog post to introduce our outsourcing service.

https://www.allquant.co/post/you-can-now-build-an-auto-pilot-portfolio-that-can-snowball-into-some-serious-money

Introducing AllQuant's Portfolio Signal Service

2021-02-02T08:27:00.000-08:00

AllQuant has done well since beginning its mission to demystify quantitative investing via the Udemy platform. We now have more than 10,000 students enrolled in our courses. Our courses are really meant for students who like to DIY 100%. They like to learn how to build the models, following which they want to operate and run the models daily and execute the trades themselves.

We have now moved on to the next stage where we are providing a more time saving solution for people who either do not have the time to run the models themselves or they have no confidence to operate them correctly. This is where our Portfolio Signal Service comes in. I shall not talk any further on this as my business partner has already written a good piece here.

https://investmentcache.com/another-mile-stone-launch-of-our-portfolio-signals/

I'll just like to end by highlighting that the AllQuant Signals landing page has been added to my Pages section as well as the Relevant links section. You can find more information on this signal service over at the landing page.

AllQuant's Multi-Strategy 2020 Performance

2021-01-11T17:51:00.001-08:00

This is how AllQuant's Multi-Strategy portfolio performed in 2020.

2020 is a microcosm of how the multi-strategy portfolio is expected to behave across a complete market cycle. It is expected to be resilient against a stock market correction, a recession, or something worse. On the other hand, in an extremely bullish environment, it is expected to lag the stock market. However, over the full cycle, it is expected to outperform the stock market. You can click on AllQuant's course landing page if you want to learn more.

AllQuant's Inaugural Webinar

2020-12-10T23:09:00.005-08:00

AllQuant just held it's inaugural webinar on Facebook Live. Topics covered include an introduction to quantitative investing, why we adopt a multi-strategy approach, as well as a review of the performance of the individual quantitative strategies and how they work together in a multi-strategy portfolio. Here's the recording of the webinar in case you have missed it.

Introducing AllQuant and Investment Cache

2020-08-18T11:47:00.003-07:00

I've been busy past few months setting up a new partnership with my former hedge fund co-PM. This new partnership is called AllQuant and it provides online courses via Udemy. The focus of AllQuant is to empower retail investors to trade and invest the same way hedge funds do. We believe in the quantitative approach as this is the easiest and surest way for retail investors to replicate the performance of hedge funds.

To achieve the maximum benefit out of our courses, it is best to take the "Finance Fundamentals for Building an Investment Portfolio" course first, followed by the courses on the various quantitative strategies.

"Finance Fundamentals for Building an Investment Portfolio" is the basic foundation course to understand the principles of portfolio construction. You will understand the importance of harnessing the only free lunch in investing and that is diversification. Ultimately, you will understand why the multi-strategy approach is the best way to achieve an efficient portfolio that is resilient across all market conditions.

It is with the end goal of building a multi-strategy portfolio that we offer multiple quantitative investing courses as follows:

"All Weather Investing Via Quantitative Modeling In Excel" teaches an asset allocation strategy that uses the same principle that the largest hedge fund in the world, Bridgewater Associates, uses to run their multi-billion dollar All Weather Fund.

"Defensive Stock Investing Via Quantitative Modeling In Excel" teaches a defensive approach to building an all-stock portfolio using trend following. This approach is grounded in sound investing philosophy and has been used by large hedge funds for many years.

"Volatility Trading Via Quantitative Modeling In Excel" teaches a volatility trading strategy that uses volatility risk premium to capture profits during calm markets and potentially act as a hedge during crisis.

"Stock Sector Investing Via Quantitative Modeling In Excel" teaches a sector rotation strategy that uses a ranking system to invest in stock sectors. It also builds in a natural hedge to navigate stock market downturns.

"Multi-Strategy Investing with Python and Excel" is the capstone of our courses. It teaches how to combine all the quantitative strategies together and manage it as one single portfolio, thereby unleashing the power of the multi-strategy approach.

I have put up the performance of these quantitative strategies that we teach on separate pages at the top of this blog. I will update their performance on a monthly basis after the end of each month.

In terms of writing articles, I would be posting more often on another blog called Investment Cache which is set up by my partner Eng Guan. In fact, I have already posted a number of articles on Investment Cache. Do check out that blog as it contains other interesting stuff as well.

Market is Pricing in Armageddon

2020-03-12T18:37:00.000-07:00

I know nothing about pandemics and the ultimate impact on the global economy but markets sure seems to think that the world is going to end. VIX just notched a close yesterday at a level very close to the peak in 2008 after Lehman went bust and threatened to end the financial system as we know it. But of course we know it didn't end.

What is amazing about the VIX spike this time round is that it shot up in record speed. It took 59 trading days for the VIX to go from a low of 19 to its peak of 81 back in 2008. This time round, it only took 16 trading days to bring VIX from 14 to 75. Whether this is the ultimate peak for this round remains to be seen...

February 2020 Report

2020-02-29T10:00:00.001-08:00

The coronavirus finally started to take a serious bite at the US stock markets this month. In the last 7 days, S&P 500 sold off consecutively every day. And in this short period, more than 12% was wiped off from the S&P 500. This is not new. There were numerous such periods throughout history since 1993. Most of it happened from 2008 onwards. And the record is being held during Lehman Crisis which saw more than 20% lost during a period of 7 days.

The fund's long positions in US equities and REITs took a hit. Even Gold which was supposed to be a safe haven asset turned negative on the final day of February. Only US treasuries turned out to be a reliable safe haven. Overall, the fund is down net 3.9% for the month and down net 2.8% for the year.

January 2020 Report

2020-02-01T11:49:00.000-08:00

The fund's profits from long positions in US equities and REITs were offset by losses from Asia equities. However, gains from safe haven assets like US treasuries and Gold tipped the month over into profits. This was tempered by losses from Crude Oil trading. Overall, the fund is up net 1.2% for the month and up net 1.2% for the year.

Asset Class Performance Contribution for 2019

2020-01-06T05:31:00.000-08:00

Below is the % performance contribution breakdown by asset class to the fund for 2019.

December 2019 Report

2020-01-01T04:02:00.001-08:00

The fund's long positions in US, Asian, European equities and Gold contributed to gains. The gains were partially offset by losses in US treasuries and tactical trading in crude oil and LATAM equities. Overall, the fund is up net 1.1% for the month and up net 9.7% for the year.

November 2019 Report

2019-11-30T07:54:00.002-08:00

The fund's long positions in US equities and a short volatility trade contributed to gains. However, the gains were offset by losses in Asian & European equities as well as US treasuries, REITs and Gold. Overall, the fund is up net 0.5% for the month and up net 8.5% for the year.

Explaining Multi-Strategy Approach in One Single Diagram

2019-11-22T07:27:00.000-08:00

October 2019 Report

2019-10-31T22:39:00.000-07:00

The fund's long positions in US equities, REITs and Gold generated gains. Volatility trading also contributed to gains. However, the gains were offset by trading losses in Asian & European equities as well as US treasuries. Overall, the fund is flat for the month and up net 7.9% for the year.

My Quantitative Investing Journey

2019-10-30T08:14:00.000-07:00

I have come a very long way as an investor since starting this blog back in 2009. I have evolved from a discretionary global macro investor to a fully fledged quantitative investor. I have developed numerous quantitative models and deployed them live in separate broker sub-accounts. Although I have tracked the live performance of each models separately, I did not track their contribution to my overall portfolio as one consolidated account, factoring in allocation size. As a result, I have been showing the separate live performance of individual models in their respective broker sub-accounts. I have also been showing the multi-strategy portfolio performance starting from Oct 2016 which is when I consolidated all strategies into a single broker account to run.

I have decided to extend my overall portfolio performance all the way back to 2007 as if I have been running all my sub-accounts in one consolidated account. This will give the full picture of my investing journey in terms of my entire portfolio performance. I will show my overall portfolio performance at the end of this post but first let me recount the various phases of my investing journey.

When I started this blog, I was a discretionary global macro investor putting on positions based on my view of global capital markets. Shortly after starting the blog, I began transitioning into a quantitative investor. The first quantitative model I developed and used was trend following on stocks. However, after going through some rough market conditions for trend following, I began to explore other quantitative models to add diversity to my trend model. The second model I developed was a volatility risk premium (VRP) model which I deployed live starting from May 2013. Shortly after that, I developed a risk parity model which I deployed from Aug 2013. I started small with these two new models as I wanted to feel comfortable with them in live trading before scaling up. Hence, my overall portfolio performance all the way until Sep 2016 was still mainly driven by my trend strategy since the bulk of my portfolio was still allocated to trend strategy.

Starting from Oct 2016, I felt comfortable enough to allocate equally among all three strategies which is when the multi-strategy portfolio was born. At the same time, I added a systematic hedge overlay on the portfolio to have some protection against black swan events. As this multi-strategy approach moved along, I've added more non-correlated quantitative models as well. At the beginning of 2018, I felt that the number of quantitative models I have in my portfolio is large enough and more importantly, sufficiently diversified that I started to employ some leverage at the portfolio level. This is where I am today.

The chart below shows the performance of my entire portfolio starting from 2007, even before I started this blog. The different colored lines highlight the different phases of my journey. This represents my entire portfolio's live track record in USD terms. I will continue to use this chart to track my multi-strategy portfolio performance going forward.

September 2019 Report: August Reversal

2019-10-01T09:00:00.000-07:00

September is historically one of the worst month for stocks. But this year, lady luck seems to favor it. Stocks rebounded this month after being battered in August. US Federal Reserve extended another 25 bps cut, in line with market expectations with hints of balance sheet expansion on the cards. While the trade fight continues, China and US tensions seemed to have thawed a little with US agreeing to postpone its planned tariff hike on USD 250 billion worth of Chinese imports from 1 Oct to 15 Oct. In the meantime, safe haven assets such as bonds and gold, retreated from its highs after bagging a solid win in August.

The fund's long positions in US and European equities generated gains. A short volatility positioning also contributed. However, the seasonal allocation to US treasuries gave back some of the profits made in August. Positions in Gold and crude oil added to losses. Overall, the fund is up net 0.1% for the month and up net 7.9% for the year.

Recession Countdown Finally Began

2019-09-06T02:26:00.000-07:00

The yield curve inversion has been a much talked about topic ever since the 10yr yield dropped below the 3mth yield. I wasn't as excited as I was waiting for the 10yr to drop below the 2yr. Yes, it is not an exact science but it's my preferred metric. I was so unexcited that I missed the actual day when that happened on 27 August. There was some intraday inversion before that but I'm talking about inversion at the close of day. See yield curve evolution below.

There is a difference with the yield curve inversion that took place before the 2008 GFC. The 30yr yield is still much higher than the 10yr now as compared to back then.

The 10yr yield is now back above the 2yr yield with safe haven assets selling off since Carrie Lam withdrew HK's extradition treaty. Hope of further trade talks between US and China also boosted risk appetite. Will this last or will the curve invert again?

August 2019 Report: Trump Tweets & Hong Kong Drama

2019-08-31T10:09:00.001-07:00

It was as if Jerome Powell passed the baton over to President Trump in August. After Powell delivered an unclear message in July's FOMC meeting, Trump went into tweeting mode non-stop on the ongoing trade war. This resulted in a see-saw equity market which ended lower in August. Adding to the drama was the escalating protest situation in Hong Kong where protesters even stormed Hong Kong International Airport. As a result, Asia was hit a lot worse than US. The S&P 500 was off 1.8% while the Hang Seng was down some 7%. The damage was actually worse intra-month but markets started to recover towards the end as hopes started to build again on some trade resolutions. On the flip side, safe haven assets were up strongly. Gold was up 7.9% and US treasuries were up from 4% in the 10yrs to as much as 11% in the 20+yrs. REITs also benefited as markets started pricing in a 100% probability of a further rate cut.

The fund's losses from long positions in US equities and volatility trading were more than offset by gains from a seasonal allocation to US treasuries. Long positions in REITs and Gold added to gains. Short term tactical trades also had a good run amidst the see-saw markets. Overall, the fund is up net 2.2% for the month and up net 7.8% for the year.

July 2019 Report: The US Federal Reserve - Neither Here Nor There

2019-08-01T01:06:00.002-07:00

July started as a month where markets looked ahead to an expected rate cut and promises of more easing at the FOMC meeting. This was set against the somber mood amidst slowing economic growth and the long standing trade spat between US and China. But not all is gloom and doom. The US earnings season yielded positive results so far and does not appear to be in danger of collapsing anytime soon even though analysts are cutting future growth estimates. These supported equity prices for much of this month until Jerome Powell delivered the final punch during FOMC. While he gave the market the much anticipated 25bps rate cut, his guidance on the future rate path was at best described as "neither here nor there". First, he disappointed the market by indicating that this is not the start of a long easing cycle but a mid-way adjustment as an insurance against elevated risk. Then he further added that it does not mean that this is going to be the only cut either. This definitely leaves a lot of room for imagination or in market language - uncertainty. Aside from US equities and REITs, most other asset classes and markets have a negative or muted month.

The fund saw good gains from long positions in US equities and REITs as well as selective shorts across other countries. Short term tactical trades also had a good run amidst the turmoil. Volatility trading added to gains. Overall, the fund is up net 1.7% for the month and up net 5.5% for the year.

June 2019 Report: Everything Worked

2019-06-29T09:48:00.000-07:00

June was a rare month where every asset class was up. Global equities were up mid to high single digits. US treasuries were up moderately. Gold and crude oil flew as the US dollar was hit hard. All these happened just because the Fed removed the word "patient" from its statement. This led to some market participants believing that the Fed is now inclined to begin cutting rates for the first time in more than a decade. Adding to hope was the upcoming talk between President Trump and Xi Jinping at the end of the month where some thawing of tension is expected.

The fund's profits from long exposure in US equities more than offset small losses from some shorts in Asia and Europe. US treasuries and a short vol positioning also contributed to gains. Overall, the fund is up net 3.2% for the month and up net 3.7% for the year.

May 2019 Report: Trade Tantrum

2019-06-01T17:42:00.001-07:00

There was never such a thing as a permanent friend or foe between nations. The only thing that matters is interest. As long as interests are aligned, they shall remain friends. But when interests deviate to the extent that one becomes a threat to another, that's when a "war" breaks out. The US-China trade war have moved beyond just trade and tariffs. This month, Trump ratcheted up the game by one notch. Besides upping the tariffs, he banned US companies from conducting any form of business with Huawei dealing a crippling blow to the Chinese technology company's plans for market outside of China. China, in return, is contemplating retaliating by cutting off supply of rare earth metals to US. These metals are essential for the making of chips used in PCs and mobiles. As these two giants fight it out, no one is spared. The equity markets tanked heavily this month. S&P 500 is down close to 7%, while Hang Seng and H-shares dived more than 9%.

The fund's long risk positions in US as well as crude oil took some losses. A short vol positioning also contributed to losses. Long US treasuries and short equities exposure in other regions of the world helped offset some losses. Overall, the fund is down net 2.5% for the month and up net 0.4% for the year.

April 2019 Report: The US Continues to Power On

2019-05-01T04:45:00.000-07:00

It certainly looks like the Fed pivot has rebooted the market and put a very strong floor under it. The S&P 500 was up 3.9% in April, reaching another fresh record high. As a result of the risk-on environment, safe haven assets did not fare so well. 10-yr treasury yields increased 10 basis points and gold was off 0.7%. Crude oil was the big winner in this climate, up 5.7% for the month.

The fund made money from long equities in US as well as crude oil exposure. A short vol positioning also contributed to gains. Equities exposure in other regions of the world were mixed with long positions offset by short positions. Overall, the fund is up net 1.9% for the month and up net 3.0% for the year.

March 2019 Report: How Low Can Yields Go?

2019-03-30T11:56:00.000-07:00

The Fed all but guaranteed no rate hikes for the rest of the year. US Treasuries surged, surpassing even US equities, as yields tumbled. The stock markets, however, had a rockier path because the growth story is weakening and signs of slowing are showing up in global economies. In addition, the yield curve inverted for the second time since Dec 2018. Specifically, the 10 year treasury yield dropped more than 30 basis points to 2.41% putting it just below the 2 month bill rate of 2.44%. An inverted yield curve is closely watched by market participants as the harbinger of recessions.

The fund was able to generate good profits from swing trading some equity markets in US and Asia, as well as crude oil. A long exposure in US treasuries and REITs were also among the top winners. Overall, the fund is up net 1.7% for the month and up net 1.0% for the year.

Yield Curve Chatter

2019-03-27T19:53:00.000-07:00

There's been quite a bit of chatter on the yield curve lately especially around the significance of the 10 year yield falling below the 3 month yield. Personally, I would pay more attention to the 2-10 spread which is the difference between the 10 year yield and the 2 year yield. But yield curve prognostication is not an exact science so let's take a closer look at the yield curve evolution since just before the Great Financial Crisis of 2008.

The yield curve is almost parallel to the yield curve in November 2006 which is when the 2-10 spread first went negative. We just need the long end of the curve to drop more and we'll be there. But even when that happens, it will still take months before the "recession" begins. However, the stock market would have peaked slightly before the official onset of recession. In the case of the GFC, the Dow Jones Industrial Average hit its peak level in October 2007. Note that the Federal Open Market Committee began reducing the federal funds rate from its peak of 5.25% in August 2007.

If the yield curve still serves as a good guide, then:

1) If the 2-10 spread goes negative, the yield curve would have "inverted" at a lower absolute level compared to the last recession. This would have implications on the ability of central banks to fight if this indeed heralds the next recession, at least on the rate cutting front.

2) It is probably still premature to call an immediate end to the current bull market. Most likely we would see the rate cut cycle begin first before the stock market tops out.

February 2019 Report: More Sweets from the Fed

2019-03-01T09:40:00.000-08:00

The Fed delivered more sweets in February in the form of announcing the stopping of balance sheet reduction soon. This proved to be rocket fuel for equities as the S&P 500 ended the month up 3%. President Trump announced a delay in China tariff hike following talks with President Xi. This fanned hopes of a good outcome in the ongoing US-China trade talks. A better than expected GDP figure at the end of the month led to safe haven assets like gold and bonds selling off.

The fund's equity longs in US more than covered losses from equity shorts in Europe and Asia which were progressively closed out during the month. A short vol positioning did well as VIX dropped 11% in February. Gold and US Treasuries lost some ground this month. Overall, the fund is up net 0.9% for the month and down net 0.7% for the year.