Macro Trading Experiment

So, let's do a little macro trading / money management experiment. None of this constitutes investment advice. But from my previous posts, you should be able to see that I think the US stock markets are headed higher this year. I had a feeling a few weeks ago, that those were the lows of the year for Nasdaq and Russell. The Russell is now re-testing that level, and the Nasdaq (NDX) is about 100 points higher. SPX likely had its lows in early February. There is always some volatility around a FOMC announcement, and the best case scenario is to get a move against your thesis, so that you can enter a trade at the best possible price. In general, trusting a feeling in any profession should be used cautiously, unless it has been kicked and slapped by feedback so many times that it has become a disciplined personal signal. Anyway, this is an experiment to give my analysis and feelings about the market some further discipline by putting them in a public space. I do manage some capital with a Chicago trading firm, so you can say that I have "skin in the game." In my mind, I've worked on this for so long that I have skin, bones, heart, and soul in the game. Paper trading with no risk at all is fairly useless, and more than likely an incentive to risk real money, which often results in losses. With some risk in reputation, I expect this will be a further benefit.

So suppose a hedge fund hired me to manage $10M. Here is what I'm going to do today. I'm going to commit to staying between a leverage ratio of 0 and 2. That's important to manage the drawdowns. Any major event that causes a market selloff could easily be 10%, or more, so what I'm saying is that if I can't anticipate it at all, then I'll have to live through a 20% or more drop in capital. I can live with that because I believe that I have a US macro model that predicts well at a 3-6 month timeframe. The out-of-sample Sharpe ratio for 2001-present historical testing is 2.7. And when I say drawdown, that could mean a market upswing, if the model is predicting lower market values. In that case I would hold a short position. I call my strategy a "Managed Macro Fund." Any portfolio drawdown is temporary on this 3-6 month timeframe, in my mind. Sometimes you have to just not watch the market in order to "sit on your hands," and avoid exiting a position out of fear. As Warren Buffett has said, "If you enjoy the weekends not watching the market, you should try it on weekdays." Admittedly, his timeframe is likely much longer than mine, but the message is still relevant. There are times you have to go do something else, because in this age of constant information flow, watching the markets can draw you in to make a poor decision. For this paper portfolio, I will use futures because they are the most cost effective tool to manage leverage. So I need to setup a portfolio based on my US macro model, with a notional value between 0 and $20M. I will use 3 index futures, ES and NQ traded on CME, and TF traded on ICE. My leverage is so low compared to margin requirements, that there should be no issue with the exchanges. The current range (as of 1:30pm on Wed Apr 30) of the futures in the order (ES, NQ, TF) is (1870-1875, 3560-3570, 1105-1115). The contract multiplier for (ES,NQ,TF) is (50,20,100). I will take the high of the price ranges, buying 32 ES contracts for $3M (32*50*1875), 84 NQ contracts for $6M (84*20*3570), 54 TF contracts for $6M (54*100*1115). The notional portfolio value is $15,018,600. Ignore transaction costs, but roughly they would be (depending on your membership at the exchanges) a few hundred dollars. Also ignore the possibility of holding T-bills as collateral in a futures account. My initial leverage ratio is just over 1.5. If the market sells off 10% from here, then the portfolio value will drop by 15%, and with only $10M in capital, that means the cash value of the account is $8.5M. I can live with that right now. If geopolitical risk picks up, or there is some unknown event that changes my views, I will make adjustments as best I can. If I can anticipate the fear, I will scale back a bit on the leverage. If things happen that I cannot anticipate, and my view is still bullish, I have some capacity to add when everyone else is selling. So to sum up, initial portfolio of (ES,NQ,TF) = (32,84,54) and initial account value = $10M.