Sunday, March 06, 2011 6:57:55 AM
Hi Adam
LD-AIM will increase volatility capture
Maybe, maybe not.
If you consider each LD trade as taking on an additional side bet of mean reversion subsequently occurring, then you might set a time period at which that side bet was considered successful or not. Using Tom's charts as an example, in this case
clearly there were more sell trades than buy trades and as such additional side-bets wouldn't have worked out as well.
Equally in other periods such as this next one
There were more balanced counts of buys + and sells - so scaling up those trade amounts would have been a good thing.
A similar type scaling effect can be achieved via choice of assets and asset blends. As the above charts reflects multiple AIM accounts perhaps the particular assets held over the period were better suited to each other and hence also to LD-AIM. If you have several AIM accounts that are all approximately the same size and trade the same amounts then matching a buy in one with a sell in another is just as good as having a buy followed by a sell in a single AIM.
By blending a fixed yield/income investment - say TLT, with a variable yield investment (stocks), the prices often move counter direction to each other over the short term.
TLT probably however will be less volatile than stocks, maybe stocks being 1.5 times more volatile, in which case an LD of the two might have the trade size scaling set to 1.0 for stocks and 1.5 for TLT.
My guess is that you could use LD AIM to equal effect using say a boring total stock market and long dated treasury pair as you might LD'ing a bunch of more volatile stocks. Perhaps achieving comparable rewards with less risk. For example if stocks and TLT hold a relatively consistent inverse short to mid term correlation (one down as the other is up) then scaling stock trades maybe 2x and TLT 3x or 4x might when combined still have relatively low overall volatility, but perhaps capture around equal numbers of + and - trades of around similar overall capital value amounts.
I suspect that arbitrarily assigning a scale factor equally to all holdings isn't perhaps the best choice.
LD-AIM will increase volatility capture
Maybe, maybe not.
If you consider each LD trade as taking on an additional side bet of mean reversion subsequently occurring, then you might set a time period at which that side bet was considered successful or not. Using Tom's charts as an example, in this case
clearly there were more sell trades than buy trades and as such additional side-bets wouldn't have worked out as well.
Equally in other periods such as this next one
There were more balanced counts of buys + and sells - so scaling up those trade amounts would have been a good thing.
A similar type scaling effect can be achieved via choice of assets and asset blends. As the above charts reflects multiple AIM accounts perhaps the particular assets held over the period were better suited to each other and hence also to LD-AIM. If you have several AIM accounts that are all approximately the same size and trade the same amounts then matching a buy in one with a sell in another is just as good as having a buy followed by a sell in a single AIM.
By blending a fixed yield/income investment - say TLT, with a variable yield investment (stocks), the prices often move counter direction to each other over the short term.
TLT probably however will be less volatile than stocks, maybe stocks being 1.5 times more volatile, in which case an LD of the two might have the trade size scaling set to 1.0 for stocks and 1.5 for TLT.
My guess is that you could use LD AIM to equal effect using say a boring total stock market and long dated treasury pair as you might LD'ing a bunch of more volatile stocks. Perhaps achieving comparable rewards with less risk. For example if stocks and TLT hold a relatively consistent inverse short to mid term correlation (one down as the other is up) then scaling stock trades maybe 2x and TLT 3x or 4x might when combined still have relatively low overall volatility, but perhaps capture around equal numbers of + and - trades of around similar overall capital value amounts.
I suspect that arbitrarily assigning a scale factor equally to all holdings isn't perhaps the best choice.
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