Friday, December 28, 2007

HF strategy to improve China equity returns

RS Management Limited (RSM) has retained hedge fund guru Dr. A S Johan and his research team to develop an algorithm driven trading system to improve returns on Asian equities by trading equity index futures as an effective proxy.

RSM is in talks with prime brokerages in Asia to help establish dedicated institutional accounts that will trade benchmark equity index futures like the Hang Seng Index and the China H - Shares Index, based on RSM's trade and hedge signals.

"Extensive back tests with real and scrambled price data, exceeding the equivalent of seventy years of history, have shown the system to be capable of producing average, risk adjusted, liquidated returns of around 30% per annum" said a researcher involved in the development.

Algorithmic Trading Strategies (ATS) may be defined as securities trading systems that wraps trading formulas into automated order and execution systems. Advanced computer modeling techniques, combined with electronic access to world market data and information, enable traders using a trading system to have a unique market vantage point. Traders, investment firms and fund managers use a trading system to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading system can automate all or part of your investment portfolio. Computer trading models can be adjusted for either conservative or aggressive trading styles.

Trading systems are governed by a set of rules that do not deviate based on anything other than market action. Emotional bias is eliminated because the systems operate within the parameters known by the trader. The parameters can be trusted based on historical analysis and real world market studies, so that the trader who is familiar with the trading system and its operating characteristics can have confidence in a pre-determined trading strategy.

There are programming languages and trading system development platforms that allow traders to create their own custom systems. One such example of a trading system is the ACD Method, a quantitative application developed by Mark Fisher, a professional trader and founder of MBF Clearing Corp., one of the largest clearing firms on the New York Mercantile Exchange, and supports the trading of several hundred exchange members. Fisher is well known for his book The Logical Trader: A Method to the Madness, which is the dissertation to The ACD Method, a quantitative systems developed at the Wharton School of Business, and is based on extensive back testing that analyzes opening price trading ranges for stocks and futures contracts.

Another example is POSIT or Portfolio System for Institutional Trading, an electronic trading system serving institutional traders. It is run by the Investment Technology Group (NYSE:ITG). It attempts to match buy and sell orders between larger traders. POSIT is a type of crossing system, where a broker acts as agent on both the buy side and sell side of a given transaction. If the broker has a buy order and an equivalent sell order, he/she can "cross" the orders. This is a common situation in the case of large orders. END