Last year I wrote a post about how to calculate Jensen’s Alpha using Excel. In this post I will provide an update on whether my trading has generated a positive alpha.
The de facto market against which one compares one’s trading performance for the calculatation of alpha is the S&P 500. As per the chart below, I am not producing a positive alpha.
My monthly alpha is -0.14% and is in large part due to the very poor performance of my trading in March of this year.
Now if I use the IASG Systematic Trader Index as the benchmark against which I calculate alpha, the picture is a little better.
You can see from the equation on the above chart that my monthly alpha is 0.65% when the benchmark used for the calculation is the Systematic Trader Index.
So if the question is “Is my trading producing a positive alpha?” the answer may be No and Yes!
I returned to trading full position sizes in the latter part of June and was rewarded for doing so with a 4.7% return for the month. I continue to stay well ahead of my benchmark (the IASG Systematic Trader Index).
There is a lot of talk in trader circles about how quiet the stock markets have become. I had a small number of stock trades last month as a low volatility environment creates few opportunities for mean reversion strategies but I had excellent returns on my volatility trades (VXX and XIV). Every volatility trade I have made this year has generated a positive return so it pays to have a basket of strategies.
I had a discussion on Facebook today that can only be described as highly unusual. I began by making a point to one of the posters that he shouldn’t have faith in a trading system but rather confidence based on a statistical analysis of closed trades. The original poster made a number of attempts to discredit me as I suspect he believed I was attacking trend following as a viable trading strategy. Without going into the weird posts that were directed towards me by the OP, there was one good point made – the Newedge CTA Index which I have used as a basis for measuring broad trend following performance includes strategies other than trend following. The only pure trend following index I am aware of is the one Jez Liberty has created for Wisdom Tree which you can find here.
Out of curiosity, I plotted my trading performance (as per my trades on Collective2) against the pure trend following index from Wisdom Tree.
Needless to say, I am pleased to have made the switch from trend following strategies to mean reversion strategies in 2012.
If you are looking for a new book to read, you may want to consider the recently published Creativity Inc by Pixar President Ed Catmull. I haven’t purchased the book yet but this review at Forbes has piqued my interest enough to order it.