A Registered Investment Advisory Firm
Quantitative Finance and Stock Market Leo Chen, Ph.D. Portfolio Manger & Quantitative Strategist Cumberland Advisors 7.12.2018
Š
Copyright 2018 Cumberland AdvisorsÂŽ. Further distribution prohibited without prior permission.
Quantitative Finance What is a quant fund?
Š
Copyright 2018 Cumberland AdvisorsÂŽ. Further distribution prohibited without prior permission.
2
Quantitative Finance • Applies to all markets. • Derivatives—Options, Warrants, Futures, Forward, Convertibles, Swaps, etc. • Math—Log, Differential Equations, Taylor Series (derivatives), Standard Deviation, etc. • Fixed-Income—Yield, Duration, and Convexity. • FOREX. • Portfolio Management. • Risk Management. • Models—CAPM, Binomial (Hedging/No arbitrage), Black-Scholes (“Greeks”), One-Factor Interest Rate, VaR, Monte Carlo, etc. • Arbitrage
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
3
Quant Funds • Automation, Algo, Programs, Machine Learning, etc. • Man Group, Renaissance, DE Shaw, Two Sigma, etc. • Set to surpass $1 trillion this year—Doubling from 2015. Quant Mutual Fund AUM ($B)* 1000
08% . 8 1 = CAGR 712 615 485
507
2014
2015
404 224
230
2010
2011
288
2012
2013
*Morningstar. Financial Times. **Estimated. ©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
2016
2017
2018
4
Multi-Factor Model • Factors—Fundamental, statistical, macro & micro, nuance (parking lot, electricity, etc.)
• Smart-beta—Are they really “smart”?
• Momentum ©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
5
Arbitrage • All markets. • Statistical arbitrage (Stat arb). – E.g. Long-Short strategies. – Minimize exposure to risks such as market, geographic, sector, currency, etc. (Market neutral) – Closely analyze statistical factors such as correlation, co-integration, etc.
• Similarly, fixed-income, convertible, commodity, currency arb. – Synthetic securities. – Spread arbitrage.
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
6
HFT & Algo • 50-60% daily volume of U.S. equity market. • Trading volume as a percentage spiked since 2009. U.S. Large Cap Daily Volume $180,000,000,000 $160,000,000,000 $140,000,000,000 $120,000,000,000 $100,000,000,000 $80,000,000,000 $60,000,000,000 $40,000,000,000 $20,000,000,000 $-
06 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 13 14 14 14 15 15 15 16 16 16 17 17 17 18 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/ 5/ 9/ 1/
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
7
HFT & Algo • • • • • • •
•
©
Speed, Speed, Speed. 1 second=1,000 milliseconds=1,000,000 microseconds. A blink of an eye=300-400 milliseconds. HFT reduces the duration of arbitrage opportunity down to below 10 milliseconds. Average processing time per order—400 microseconds. Average sharing holding period—8 months in 2000; 2 months in 2008; less than 20 nowadays. A firm built a straight line between Chicago and NASDAQ’s server in NJ with tunnels through the Allegheny Mountains to shave off 3 milliseconds. Total cost — $300 Million. Regular investors receive data 1,500 to 900 milliseconds later than HFT —Years in the field of HFT.
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
8
HFT & Algo • Fun facts
– – – – ©
Sharks. Laser beam technology—U.S. military communication. Drones, satellites, and balloons. Machine learning to create rules: what rules?
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
9
Stochastics • • • •
©
Forecast & Probability. Stochastic calculus, integration, differential equations, etc. Markov, Martingale, Ito’s Lemma, etc. Random walk—Lognormal RW, Mean-reverting RW, Correlated RW, etc.
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
10
Fibonacci Sequence • 0,1,1,2,3,5,8,13,21, 34,55,… • Golden ratio 1.618 • In nature
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
11
Quantify Market Behaviors • How do we observe and measure market sentiment? • Is an oversold market equivalent to market fear? Vice versa?
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
12
Cumberland Advisors • Our quantitative strategy—Market Volatility/Leveraged Market Volatility Portfolio. • Using Bayesian updating, constantly capturing market conditions & trying to avoid human emotions. • Designed to minimize investment risk while maximizing compounding return. • Why should we avoid emotions?
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
13
Thank you • Questions and comments are welcome.
©
Copyright 2018 Cumberland Advisors®. Further distribution prohibited without prior permission.
14
Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. This presentation represents personal opinions only.
Š
Copyright 2018 Cumberland AdvisorsÂŽ. Further distribution prohibited without prior permission.
15