A few Words about the Drawdown
As you must have noticed, the portfolio drawdown gets larger on an almost daily basis, i.e. 17.8% from the peak, 11.8% from the day I started this blog, and 8.9% since I made a major change in the portfolio on July 23 (terminating auto trading and extreme-os, and including Longstoch-ST and ARS).
So, let's analyze what's going on:
1. About half of the 17.8% drawdown from the previous peak is due to a drawdown before the major portfolio change, and about half is due to a drawdown after that date. In other words, I experienced two consecutive drawdowns on 2 different portfolios.
2. All systems in the new portfolio, except Trend Plays #1, are setting fresh max drawdowns every day:
ARS -9.71%
Weekend Trader -15%
Longstoch-ST -13.44%
Note, however that these started earlier than July 23. Losses since July 23 are about 8% per system on average.
3. Because I was leveraged, these losses were bigger in my portfolio. At the same time I was partly hedged (only fully hedged beyond S&P500 drawdowns of ~7%), so ending up with a portfolio drawdown of 8.9% since July 23 is nothing unusual.
4. The next few days will be interesting. If the sell-off continues, I will become fully (delta) hedged (because the SPY Dec 144 puts will start to have delta's < -0.5) and I will start to roll these over to lower strikes (to avoid becoming over-hedged). On the other hand, if the market rallies we have to hope that the systems will keep outperforming the market (i.e. their returns should exceed the losses on the puts).
5. Experiencing this drawdown has many positive sides. First, we can see the systems perform during adverse market conditions. This will only benefit me, as it allows a more robust selection of systems in the future. Second, I have learned that it will probably pay off to spend some time on improving the hedge, e.g. estimate betas with more advanced models, backtest various hedging strategies and use of multiple indices.
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