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Starting an investment business - Page 12

post #166 of 273
Pretty solid, keep up the good work.
post #167 of 273
Thread Starter 
So we're still flat from January. This led us to do some experimentation with our backtesting, and we found that the correlation between performance at the end of two years is not as well correlated to the third year's performance as we thought -- this obviously has a significant implication for our method of selecting algorithms to use (we select which algorithm to use going forward by looking at the hypothetical performance over the last two years).

Basically, we freaked out.

However, I've managed to come up with a more rigorous selection method and I'm getting an r-squared of about 0.5 right now, and I'm thinking I can drive that up further with more experimentation.

All in all, I think we can fix this bug but it will definitely come at the cost of lower expected returns, because it's going to force us to average the outcomes of a bunch of algorithms instead of betting the whole farm on a single algo, in order to reduce our risk appropriately in light of the new findings.
post #168 of 273
Nameback just out of curiousity what exactly are your qualifications to manage money?
post #169 of 273
Thread Starter 
Quote:
Originally Posted by JoelF View Post

Nameback just out of curiousity what exactly are your qualifications to manage money?

None! I have no experience managing money prior to this. My experience is strictly in statistics and analytics.

Obviously that makes this whole endeavor more difficult from the fundraising side, but we think with a good year under our belts and a lot more backtesting and analysis, we can recruit funders.
post #170 of 273
Quote:
Originally Posted by NameBack View Post

My experience is strictly in statistics and analytics.
.

Don't forget 'bad ideas'.



No, but seriously, I'm relieved you've found success outside the Beltway.
post #171 of 273
Thread Starter 
Quote:
Originally Posted by StephenHero View Post

Don't forget 'bad ideas'.
No, but seriously, I'm relieved you've found success outside the Beltway.

You think I'll stay outside the Beltway forever? What do you think I'll do with all that money when this finally pans out? devil.gif

Also, it appears that we may have stumbled on the solution to our problem. While finding a consistent method of high correlation between periods of performance has eluded us, we've realized that the first 3-6 months of any algorithm's performance tend to be its best months. Therefore, even picking algorithms at random, if we diversify (both in terms of algos and equities) and restrict our models to durations of no more than six months out from the build/training period, we think we should be able to clear strong returns.
post #172 of 273
So are you hoping to eventually sell your algorithms or put it to use and raise your AUM?
post #173 of 273
Quote:
Originally Posted by NameBack View Post

You think I'll stay outside the Beltway forever? What do you think I'll do with all that money when this finally pans out? devil.gif

I have a feeling that your brain will be a less fertile ground for half-baked socialist schemes now that you're the one footing the bill.
post #174 of 273
Thread Starter 
Quote:
Originally Posted by gettoasty View Post

So are you hoping to eventually sell your algorithms or put it to use and raise your AUM?

Put it to use and raise our AUM.

We've already raised enough money for all the legal and administrative costs required to set up a hedge fund; we're just waiting to build a track record and make sure everything works before we pull the trigger on founding the fund.
post #175 of 273
Thread Starter 
New backtesting with new more rigorous methodology is lookin' fucking sick.

We abandoned trying to find any kind of correlation between returns during different time periods, because there wasn't any.

So instead we select ten models at random, average their positions together, and use them for a two week period before rebuilding all the models and doing it again.

Thus, the results of our backtesting represent exactly what we would have earned on a given equity in a given year, because this methodology eliminates any hindsight whatsoever.

So far our average annual return is looking like 75%, but it's still very early. It's much more labor intensive to test using this process, since we have to build and backtest 26 sets of models for every year (and there's 864 models per set, which means ~22,000 models per year, which ALL have to have to be backtested).

Exciting stuff! Will keep you guys posted.
post #176 of 273
Quote:
Originally Posted by NameBack View Post

New backtesting with new more rigorous methodology is lookin' fucking sick.
We abandoned trying to find any kind of correlation between returns during different time periods, because there wasn't any.
So instead we select ten models at random, average their positions together, and use them for a two week period before rebuilding all the models and doing it again.
Thus, the results of our backtesting represent exactly what we would have earned on a given equity in a given year, because this methodology eliminates any hindsight whatsoever.
So far our average annual return is looking like 75%, but it's still very early. It's much more labor intensive to test using this process, since we have to build and backtest 26 sets of models for every year (and there's 864 models per set, which means ~22,000 models per year, which ALL have to have to be backtested).
Exciting stuff! Will keep you guys posted.

You're not still trying to do this all with a bunch of excel formulas are you?
post #177 of 273
Quote:
Originally Posted by otc View Post

You're not still trying to do this all with a bunch of excel formulas are you?

I'd imagine he has something more powerful, like matlab.
post #178 of 273
Throwing around numbers like 75% annually seems a bit aggressive, IMO.
post #179 of 273
Thread Starter 
Quote:
Originally Posted by otc View Post

You're not still trying to do this all with a bunch of excel formulas are you?

Some of it is done in Excel, but a lot is done in R.
post #180 of 273
Thread Starter 
Quote:
Originally Posted by SkinnyGoomba View Post

Throwing around numbers like 75% annually seems a bit aggressive, IMO.

It's no guarantee of future returns, but like I said, our backtesting is totally unbiased, so that is what we would have earned. I'll post a chart of our results so far in a bit.
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