2020 year-end performance review, and analysis of lessons learned
Intro
I had started this blog in November of 2019 while I was interning my senior year of NYU at a macro fund in New York. At the time I had gotten far enough along in developing my macro framework that I started this blog as way for me to clarify the thoughts I had about markets. To my good luck, there was interest in my writing and I continued. Now that I have a full year's worth of blog posts published, it seems only fitting to hold myself accountable to the performance of my recommendations. I plan to do this as long as I write the blog, through the good times and through the (hopefully not as many) bad times.
With that being said, being a newer market participant, 2020 has been an excellent training ground for developing skill in macro earlier on in my career. I have thought about the skills that must be developed as following two different avenues, which sometimes relate. The first of these is the fundamental global macro framework required to develop the views I have written about in this blog. The second of these is the raw trading and risk management ability to be able to profit off of my views. When they relate is near the end of a trend before most people have figured out the fundamental reasoning for a shift, even though it's starting to (inexplicably) show up in the price action.
Throughout the year, there were several times at which I had to develop both of these skills which led to the subsequent progression of my equity curve in my live trading account which I have attached below. I will go through this in thirds as that's how for most of this year I had framed the year - the beginning of the year with the selloff, the summer, and the end of the year.
Performance
The results from the beginning of the year were decent, but were fraught with challenges. The primary challenge at this time was with risk management rather than a misunderstanding of market fundamentals. For example, I didn't predict the severity of the selloff, but I could see there might be some rumbles in the market due to Covid. The challenge with this however is that since at the time I had a smaller account, it became difficult to trade the futures I was normally accustomed to with the volatility at the time. As a result I was precluded from taking part in the major trades due to risk management concerns. Once it got started however, I was also able to call the deflation trade in march and was able to profit off of the short gold trade as well as getting short dollars after I correctly surmised the selloff was done. This helped build my account and be able to handle more markets. The challenge with this however was that I didn't know how to manage risk as well. I would risk too much of my capitals with the thinking that I had previously made money and I could bet bigger. This was a grave error. It also led to a period of a few months where my equity curve moved in a range as I was unable to keep the money I made, even though I was correct in many of the calls I had made (example being long oil in the 20s, not being short stocks after the march lows).
This led to an exploration into the topic of risk management. It was at this point that I adopted a modified vaR risk measurement on an individual trade level. I also started the work of setting risk limits on individual trades, as well as managing the risk on any new additions to a position, as well as creating a process for setting my stops. By the end of this period, I had some semblance of risk management in place so that my equity would no longer move in a range and go higher, which it did. In hindsight the challenge that remained was figuring out how to take profits on individual trades which would come into view in the second third of the year. Some thought was given to the idea of building portfolios and managing macro themes, but this became more complex later in the year.
The Summer
After having laid the initial groundwork of risk management, I was able to start seeing more consistent profitability. As a result I had a larger capital base to manage. With my risk management starting to come into view, I was able to start trading in more markets. Before I was only trading index futures and some commodities in the softs complex and a few G10 currency futures. After my account started growing I wanted to trade in both EM and DM FX, expand my reach in commodities as that was my starting point in markets, as well as USD Rates. However for me to do this properly, I had to make improvements in my macro framework to be able to account for how the various products and asset classes moved together.
As a result, I started filling in the gaps in my knowledge of economics, economic history, and political economy that I wasn't taught at NYU. I did this by learning economics as a historical process - this means that there may not be immutable laws of economics rather ideas about how it should be done that develop over time. As a result I read Keynesian, Austrian, Neo-Keynesian, and Monetarist economics, and topped it off with learning about MMT. It was as a result of doing this that I ended up writing the blog posts I had during the summer detailing the different methods of understanding inflation. It was also as a result of this education that I was able to have a large upturn in my equity curve during the summer. This happened by being one of the first to call the short dollar trade we've seen in the second half of the year, being long silver before its exponential upturn, as well as the steepener trade in USD rates that we have seen this year which were all written about in this blog ahead of time.
End of the Year
Coming into the end of the year, an obvious challenge came to light in the macro framework I had been developing. It's that I wasn't yet able to make money on selloffs in risk assets. This was because the fundamental macro framework I was developing couldn't yet understand the economic logic for being short stocks and risk in general. The worry with this is that it just becomes a strategy to be long risk with a range of asset classes, but can be achieved much easier by buying an index. This is what led to the subsequent retracement in my equity curve in September. Though I think I have figured out the solution to this issue in my macro framework, only more experience will be able to validate my view right.
The other part of this retracement in September was another refinement to my risk management. What led to such a deep drawdown was that I would hold onto my losing positions until they hit the stop that I had previously set. I subsequently realized that this might not be the best way to manage risk. Instead, what I started doing after September was to remove any futures positions that were losing at the end of a session and look to get back in at a later date with a better entry. As a result of this, the drawdown that happened in October was much less steep than what happened in September. I also realized the value of options in that they are useful for building up positions for a macro theme at a time when markets are choppy and would not be conducive for trading futures with this rule. It also set me up for the massive rally in my equity curve after the November election. In the last two months due to this rule, my sharpe had gotten above 3.5 even though for the year it was 2.
The other challenge was that now that I was able to have winning trades and be profitable more consistently, I had to be able to extract maximum value from them. The reason I was unable to extract maximum value is because it turned out that the stop-setting procedure I had developed earlier in the year was insufficient. This is because it led me to getting stopped out of winning trades before they had reached exhaustion. The innovation that came from this challenge is that now I think much more about price targets based on fundamental and technical bases rather than looking to protect my profits by aggressively moving up my stops which can lead to false exits. This means that I look for a range of price targets that the trade might hit. Where in that range the trade might be over depends on the state of the macroeconomy at that time. It's when it starts to get into my price target range that I get much more vigilant about taking and protecting profits. This is one of the major improvements that led to the rally in my equity curve in November and December as I was able to hold my winners until the very end (oil from $35 to $50, copper from $300 to around $350, Qs from around 11,000)
Going forward
From here, what I look to work on is improving my ability to reap maximum value. This is because the most recent drawdown I have experienced happened because I was able to extract max value by being long oil, but didn't get out before it turned. For example I had envisioned that oil might be anywhere from $50 - $55. However, it seems that $50 was as much as it would be able to get up to which was right near the bottom of my target, and was something I didn't think was likely. This is going to require a more vigilant approach to watching possible targets within the range and taking profits.
The other thing I plan to work on is improvements in my macro framework as I am now looking to explore even more markets. Now I plan to expand farther into EM indexes, rates, and perhaps credit rather than only being an observer of those markets. I also plan to expand out to indexes outside of the US such as FTSE, EuroStoxx, and ASX. In the US I plan to expand into credit indexes as well as single name equities. This is because I think I might now have a handle on how indexes trade and am interested in taking a macro approach to single names where the volatility can be extremely rewarding if done properly.
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