Hence, it was with some excitement that I went on an actual holiday recently to Hong Kong, although admittedly I still gave over one full day to meetings! Whilst reading about Hong Kong gave me some ideas of what I would see, it was a poor substitute for describing the experience of visiting the city. The skyline was all the more vivid in real life (see above). Indeed, the skyscrapers lights leapt from beneath the swarm of fog, in a way that a photograph struggles to capture. The bustle of the streets was something I had expected, yet it it seemed far more hectic in real life.
More broadly, the richness of the travelling experience is simply too rich to somehow condense into a few words. It would be difficult to say that reading a book about a city would provide a more vivid snapshot, compared with visiting it. A writer can try. A good writer might even succeed, yet in most cases, a book would compliment a visit rather than replacing it.
In markets, there is the obvious parallel when it comes to researching a market and having experience in trading. It reminds me of several questions I have been asked repeatedly during my decade in markets.
First, what does Renaissance Technologies do? I have no idea, is the answer to that. Although my suspicion is that they somehow manage to run an insane number of strategies and adapt these effectively over time. I have no belief in the idea of a secret sauce in markets (and more can be read about that in my book Trading Thalesians).
Second, perhaps more pertinently, an even more common question I have been asked is, if your research in systematic trading strategies is so good, why don't you trade yourself? In my very first years in the industry this was a pertinent question. Neither my personal capital nor my firm's capital (Lehman Brothers at the time) was run on any of my systematic trading strategies.
However, later, I was lucky enough to have capital placed on my systematic trading strategies both at Lehman Brothers and later at Nomura. Even then, the idea that I had skin in the game, to use an expression popularised by Nassim Taleb, was inaccurate. My downside from any of these strategies was limited to losing my job. Somewhat ironically, one of my best years for one of my trading strategies, was in the year that Lehman Brothers filed for bankruptcy and as a result, I lost my job in any case, when the company closed.
In the summer 2013, I quit my job as an Executive Director in FX at Nomura, primarily to publish my book Trading Thalesians and mainly to consult on systematic trading strategies for the Thalesians, a company I co-founded. At the same time, I decided it was about time to have my own skin in the game and to invest in my own trading strategies. My live strategies have had a Sharpe ratio of over 2 over the past 2 years I have run them. I can safely say it has been an great learning experience! Just as with travelling, an important way to learn about markets is to have your own capital at risk, once you have enough experience to do it (a crucial caveat). As I have said repeatedly, there is no way to backtest pain from a drawdown. Once you have a real life drawdown with your own cash, it focuses your mind in a way that no amount of research or reading can, from my personal experience. Of course, I've made mistakes. There are things I wish I had done better, notably I wish I had taken more risk in my trading, given the favourable results! There are also strategies I researched which I didn't end up trading, which would have ended up being profitable.
I still think research and reading about markets is crucial, as is discussing the market with fellow practitioners and academics. However, I believe these should be done as a compliment to trading in the market. Does this mean that everyone should consider trading their own money? Not necessarily, in certain instances strategist are not always going to be good at developing strategies as they are at risk managing them. Furthermore, in some instances, it might be complicated by compliance issues.
In retrospect, everyone, who asked me that second question had an excellent point! At least now I have an answer, whenever anyone asks me: yes, I have traded my own trading strategies! That perhaps is the most valuable outcome of this whole exercise, gaining this experience and helping it inform my research into systematic trading strategies.
Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our Meetup.com group for more details here.