Friday 29 August 2014

Burgers & implementing trading strategies

11:57 Posted by The Thalesians (@thalesians) No comments

It has been a (light hearted) challenge of mine to find if there is a link between trading strategies and burgers, which are probably the best invention involving sliced bread. At long last, I found some inspiration at Mr. Hyde's National Burger Day inspired burger festival, which recently took place by the disused Battersea Power Station. 

The festival brought together 12 different burger joints, each producing their own take on the humble burger. As somewhat of a burger aficionado, I took it upon myself to sample as many burgers as possible, to such an extent, that I am currently on a self-imposed burger exile. Whilst, I did not quite manage to sample burgers from all 12 vendors, I had quite enough to ascertain that the burgers were of varying quality and also taste, despite looking the same. The most wacky example was the "cake" burger pictured above. Yes, it really is made of cake, and no it doesn't taste like a beef burger.

By this stage, I suspect, you, the reader might doubt my claim that this ode to burgers really does have something to tell us about trading strategies. However, bear with me, a bit longer. Just as the concept of a "burger" can encompass many different types of beef inspired sandwiches, terms such as trend, carry and value can cover a very broad umbrella of trading strategies. Obviously, we would expect that the various trend following strategies employed by CTAs to display a modicum of correlation. Furthermore, if a certain trend following strategy appears to be consistently profitable, whilst all others are losing money during the same period, we might conclude that perhaps, the strategy might be doing something than simply trading price momentum. More succinctly, just as most burgers consist of a bun with a patty of minced beef, so families of strategies share various characteristics. 

However, just as with burgers, whilst there are similarities, it is the details that can separate various strategies. Let us again take the example of a trend following strategy. How precisely is the trend following signal calculated? How is risk allocated between the assets? Are there filters to reduce risk when markets are in a more range bound state? When all these details are added up they can explain the variation in returns between the various implementation of such a trading strategy across different funds. So, when it comes to trading strategies, it's not so much a secret sauce, which describes some super secret unknown strategy. Instead, it is a matter of lots of incremental details which are added to a relatively common strategy which gives it value. Indeed, I am sceptical of the notion of there being a some sort of "secret sauce" when it comes to building models.

So next time you indulge in a burger, remember it's the details which count. A Big Mac most definitely does not taste like every other burger, just as various implementations of trend following strategies can differ, when it comes to returns, even if on the surface they seem quite similar!

My book Trading Thalesians also has some colour on the idea of secret sauce in markets and my thoughts on whether it really does exist (mixed in with a bit of ancient history).






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