EFTA02725017.pdf

Alex Gerasev Bounded Tradable Processe EFTA02725017 Confidentiality ■ Information in this presentation is strictly private & confidential EFTA_R1_02212454 EFTA02725018 Background ■ Strategy live at Buttonwood Group Trading (BGT) 07/2011-1o/2012 (16 months); back-tested from 01/2006 with similar performance results ■ Founder of Quanterra Advisors LLC and developer of quantitative trading strategies since 06/2010 ■ Project Manager/ Subject Matter Expert, Global Banking & Markets at RBS and ABN AMRO 2001-2010 ■ M.Sc. in Financial Mathematics, University of Chicago ■ B.Sc. in Physics & IT, Novosibirsk State University ■ Research atVEPP-4 electron-positron collider of Novosibirsk Institute of Nuclear Physics (11 GeV energy range) EFTA_R1_02212455 EFTA02725019  Track Record Buttonwood Group Trading, 07/2011 — 10/2012 EFTA_R1_02212456 EFTA02725020 Live Track Record Ptc Date range 07/2011 —10/2012 (16 months) Reserved capital 3.5m Average utilized capital (AUC) 1.4m Available leverage 15X Reinvestment of gains into the strategy No Asset classes Equities (85%); futures (15%) Total net PnL o.97m (67.5% return on AUC) Positive months 13 (81%) Negative months 3 (19%) Best month O. 27M Worst month - 0.07M Sharpe ratio 2.67 EFTA_R1_02212457 EFTA02725021 Live Track Record - BGT Monthly Net PnL 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 • 0.00 2011-07 zon-o8 2011-09 2011-10 2011-11 2011-12 2012-01 2012-02 2012 -04 2012-06 2012-07 2012-08 2012-09 2012-10 -50,000.00 -100,000.00 EFTA_R1_02212458 EFTA02725022 Live Track Record BG Cumulative Net Return on AUC 80.00% 70.00% 6o.00% 50.0o% 40.00% 30.00% 20.00% io.00% o.00% 2011.07 2011.08 2011.09 2011.10 2011.11 2011.12 2012.01 2012-02 2012.03 2012.04 2012.05 2012.06 2012-07 2012.08 2012.09 2012.10 EFTA_R1_02212459 EFTA02725023 Live Track Record — BG7 Comments: • Reinvestment of strategy gains back into the strategy would have resulted in significant performance improvement due to compounding (total return on AUC 89.9% vs. 67.5%) • Strategy performance was negatively impacted on at least 3 occasions by emergency re-allocation of capital to other traders EFTA_R1_02212460 EFTA02725024 Back -Testing Track Record 01/2006 - 12/2012 (84 months) EFTA02725025 Back-Testing Track Record Date range 01/2006 - 12/2012 (84 months) Reserved capital i.om Average utilized capital (AUC) o.62m Available leverage isx Reinvestment of gains into the strategy No Asset classes Same as live trading Annualized net PnL 0.57m (57.8%) Positive months 70 (83%) Negative months 14 (17%) Best month 0.42M Worst month -0.17M Sharpe ratio 3.12 EFTA_R1_02212462 EFTA02725026 Back-Testing Track Record Observations: ■ Slightly better performance vs. live performance during 07/2011 —10/2012 period (no capital re- allocation issues as mentioned above) • Slightly better overall performance (higher average volatility) • Market volatility results in better performance; best years for the strategy were 2008 and 2009 EFTA_R1_02212463 EFTA02725027 Strategy Description Bounded Tradable Processes EFTA02725028 Strategy Description: Bounded Tradable Processes "Process" can be single financial instrument (stock, future, option, FX, etc.) two-legged spread S = X— aY, where X and Yare financial instruments (stocks, futures, options, FX, etc.) three-legged spread S = X— aY— bZ, where X, Y, Z are financial instruments complex combination spreads e.g. S = aX/Y, S=aX —bY/gZ, etc. "Tradable" means that all components of S can be traded at any time in required quantities (given liquidity constraints and other technicalities) EFTAJR 1_02212465 EFTA02725029 Arbitrage Bounds Tradable Process that has lower, upper, or both lower and upper arbitrage bounds can be unwound at a pre- determined price Various "mechanics" enforcing bounds Asset swap ("fungibility"): X may be swapped for Y at holder's discretion — ensures that X> Y; if X < Y, buy bunch of X, swap for Y and sell Yfor higher price and riskless profit ("pure" arbitrage) Multi-step asset swap: similar to above, but involving multiple steps to unwind complex spread at pre- determined price "Hard" bounds — guaranteed to be able to unwind the process at a known price EFTA_R1_02212466 EFTA02725030 Non-Arbitrage Bounds Process should not go beyond certain values due to fundamentals; however there is no way to unwind if it does Example: "asset quality" Equity with voting rights vs. equity without voting rights Higher-grade commodity vs. lower-grade commodity Senior vs. subordinated debt Once the process moves beyond the bound and information spreads through the market, the relationship would typically get restored as participants buy superior asset for less, or holders of inferior asset replace it with superior asset while booking a profit More dangerous than arbitrage bounds — reflect in position sizing (e.g. io% of arbitrage-bounded trade) EFTA_R1_02212467 EFTA02725031 Example: Arbitrage Bounded Process ("hard" bound at zero) EFTA_R1_02212468 EFTA02725032 Example: Non-Arbitrage Bounded Process ("soft" bound at zero) 25 20 15 10 5 0 S EFTA_R1_02212469 EFTA02725033 Approach to Trading ■ The closer the process gets to its bound, the bigger the position with i00% of target position size right at the bound ■ As the process moves away from the bound, reduce position size ■ As the process oscillates we generate PnL buy buying lower and selling higher ■ The schedule of process values and corresponding position sizes is known as loading curve EFTA_R1_02212470 EFTA02725034 Loading Curve Example EFTA_R1_02212471 EFTA02725035 Profitability Analysis Volatility is good! Great opportunities when position can be entered or increased close to the bound and unwound as the process moves away Worst-case scenario: process approaching its bound with very low volatility and staying at the bound for prolonged period of time EFTA_R1_02212472 EFTA02725036 Other PnL Contributors ■ Market making ■ Intraday fluctuations ■ Capturing market impact ■ Mean-reversion EFTA_R1_02212473 EFTA02725037 Loading Curve Optimization ■ Goal: create a loading curve shape that would • maximize PnL • minimize drawdowns • minimize PnL volatility • maximize Sharpe ratio • other considerations ■ Highly computationally-intensive optimization techniques based on historical data EFTA_R1_02212474 EFTA02725038 Competitive Advantage Space not nearly as crowded as pure arbitrage trades Requires significant R&D efforts that further reduce competition Unique and highly computationally intensive process of model calibration and optimization EFTA_R1_02212475 EFTA02725039 Capacity and Scalability EFTA02725040 Existing Product Groups 14 product groups (tradable processes) are fully set up and are available for trading Estimated capacity without adverse impact on performance: up to io —15m Further scalability with some performance impact: up to 20-25m EFTA_R1_02212477 EFTA02725041 Adding New Product Groups New product groups (tradable processes) may be added Approximately 2 months of R&D per product group Many interesting opportunities in international markets EFTA_R1_02212478 EFTA02725042 Expanding Across Asset Classes ■ Same quantitative research methods may be applied to other asset classes and across asset classes ■ Virtually unlimited scalability ■ Some ideas: • Commodity calendar spreads or spread options + physical storage • Inter-commodity spreads + physical asset (refinery, power plant) • Convertible debt • Debt + CDS EF1A_R1_02212479 EFTA02725043 Summary EFTA_R1_02212480 EFTA02725044 Summary Time-tested strategy with excellent performance characteristics Market-neutral with no correlation with the S&P 500 Highly scalable Diversified portfolio of trades already live Robust quant research framework Large search universe for adding new product groups Further scalability by expanding across asset classes EFT4_81_0221 481 EFTA02725045