In the fall of 2008, the investment world received a rude reminder that forecasts and risk have more uncertainty than we would like to believe. From August 28 to the following March 9, the S&P 500 dropped 47%. Even more remarkable was that every investment was dragged down with it-hedge funds that were expected to offer diversification, commodity funds, real estate, art, and of course, every possible stock in nearly every country. When a market like this comes along, what is a trader to do? How to manage risk? Where are the hedges?
The solution to all this risk and uncertainty, says world-renowned trading systems expert Perry Kaufman, is to take market positions that are not exposed to directional risk. Trading a spread or market neutral position takes price shocks out of the picture completely. In Alpha Trading, Kaufman shows how to make trading profits even when there are no market trends and price shocks rock the markets every day. His strategies, long shown to be profitable, are called statistical arbitrage, or stat-arb, and they can be traded by holding positions for a few days, as he suggests, or for milliseconds as implemented by the big investment houses. They include all forms of stat-arb trading, from spreads to yield-curve trading to program trading, and from the simplest pairs trade to large-scale market neutral strategies. Kaufman covers each one in detail, ultimately showing you how to change the shape of your risk and drastically increase your probability of profiting under any market conditions.
With his decades of experience in almost every type of market, Kaufman's guidance, strategies, and lessons will be a welcome addition to the trading literature for professional and serious individual traders for years to come.
A companion website includes spreadsheets to perform the calculations found in the book, including those for pairs trading, risk-adjusted spreads, cross-market trading, traditional market neutral trading, and other stat-arb methods.
Alpha Trading will help serious investors and traders make money when markets make no sense. With tested strategies and systems for profitably trading in directionless markets, Kaufman shows traders how to exploit new highs and lows, hedge primary risk components, find robustness, craft a diversification program, and much more, complete with spreadsheets to do the calculations. Each step of the process is explained and illustrated with examples of how the numbers should look.
Inhaltsverzeichnis
Preface ix
Chapter 1 Uncertainty 1
Impact on Trading 2
The Inevitable Price Shocks 3
Why So Much about Price Shocks? 9
Complexity and Contagion Risk 10
The Ugly Side 11
Taking Defensive Action 11
Accepting Performance for What it is 13
Chapter 2 The Importance of Price Noise 15
Noise Explained 15
Different Markets 19
A Closer Look at Equity Index Markets 21
Importance of Noise 22
Determining the Strategy 25
Capitalizing on the Trend of Noise 29
Chapter 3 Pairs Trading: Understanding the Process 31
The Process 32
The Basics 32
Target Volatility 54
Home Builders 65
Using ETFs 78
Portfolio of Home Builder Pairs 84
Execution and the Part-Time Trader 89
Stop-Losses 89
Trading Intraday 90
Key Points to Remember 90
Chapter 4 Pairs Trading Using Futures 93
Futures 94
Mechanics of a Pairs Trade in Futures 97
Inflation Scares 100
Trading Energy Pairs 102
Revisiting Momentum with Energy Markets 105
A Miniportfolio of Natural Gas Pairs 112
The Inflation Pairs: Crude, the EURUSD, and Gold 119
Equity Index Pairs 128
Leveraging with Futures 138
London Metals Exchange Pairs 141
Volatility Filters 153
Interest Rate Futures 154
Summary 154
Chapter 5 Risk-Adjusted Spreads 155
Dell and Hewlett-Packard 155
Trading Both Long-Term (Hedged) Trends and Short-Term Mean Reversion 159
Gold, Platinum, and Silver 161
The Platinum/Gold Ratio 163
Implied Yield 170
The Yield Curve 174
Trend Trading of London Metal Exchange Pairs 179
Summary 184
Chapter 6 Cross-Market Trading and the Stress Indicator 187
The Crossover Trade 188
The Stress Indicator 189
Gold, Copper, and Platinum 195
Mining Companies 198
Agribusiness Pairs 206
The Major Energy Producers 208
Portfolio of Cross-Market Energy Pairs 220
Other Opportunities 226
Some Final Notes 228
Chapter 7 Revisiting Pairs Using the Stress Indicator 229
Futures Markets and the Stress Indicator 229
Equity Index Futures 230
Interest Rate Futures 238
The Portfolio Spreadsheet 245
Summary of Pairs Trading 248
Chapter 8 Traditional Market-Neutral Trading 249
Home Builders 250
Trend or Mean Reversion? 250
Basic Market-Neutral Concept 251
Volatility-Adjusting the Position Size 264
Arbing the Dow: A Large-Scale Program 267
Thoughts about Market-Neutral Trend Following 274
Market Neutral Using Futures 274
Market-Neutral Comments 277
Chapter 9 Other Stat-Arb Methods 281
Trade-Offs 282
System Briefs 282
New Highs and New Lows 290
Merger Arb 290
Creating Your Own Index Arbitrage 292
Arbing the Dow 301
Arbing the S&P 500-Index Arbitrage 302
About the Companion Web Site 305
About the Author 306
Index 307
