003 - Two Quants - Moritz Seibert & Moritz Heiden (Part I)
Sep 18, 2023
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Moritz Seibert & Moritz Heiden, quants from Takahe capital, discuss their trend following strategies, philosophy, practical tips, their journey into systematic trading, love for outdoor activities, influences on trading, background in delta hatching, the role of volatility in strategies, issues with volatility targeting.
Using simple models in trend-following strategies requires skill and experience to establish robustness and consistency.
Trading uncorrelated markets enhances portfolio diversification and reduces overall risk.
Breaking down equity indices into individual stocks allows for diversified trading and avoids the challenges of shorting individual stocks.
Deep dives
The importance of simplicity in trend-following models
The podcast emphasizes the significance of using simple models in trend-following strategies. While these models may appear naive or too simplistic, they require experience and skill to establish robustness and endurance over time. The goal is to generate consistent profits by truncating part of the distribution and avoiding large losses that can be psychologically and financially devastating. The focus is on keeping losses small, allowing the winners to take care of themselves, and accepting the natural volatility of the trading process.
Trading uncorrelated markets for diversification
The podcast advocates for trading uncorrelated markets to enhance portfolio diversification. The trend-following approach involves trading different markets that are independent of each other, such as crude oil and corn, to reduce overall risk and increase the likelihood of achieving profits. While the podcast acknowledges the potential benefits of adding non-standard CTA markets like freight and power, it also highlights the operational complexities and credit risks associated with trading these markets. The focus remains on effectively managing risk and protecting the portfolio.
Breaking down equity indices into individual stocks for diversification
The podcast suggests breaking down equity indices, like the S&P 500, into their individual stock components to further diversify the portfolio. By trading specific stocks that have distinct businesses and lower correlation to each other, the strategy aims to capitalize on the potential diversification benefits while avoiding the challenges of shorting individual stocks. The podcast acknowledges the potential difficulties with shorting smaller stocks and emphasizes the importance of liquidity and careful selection of stocks to maintain an effective short strategy.
Maintaining Open Trade Equity and Defining Risk Budget
The podcast emphasizes the importance of maintaining open trade equity and having a defined risk budget when trading. The speakers believe in letting winning trades run and not constantly adjusting or trimming positions as they develop. They view trading as a game of playing the hand you're dealt, without trying to control or predict the market's movements. They prioritize the philosophy of keeping losses small and allowing the potential for uncapped and unlimited gains. By not succumbing to biases and the temptation to secure profits early, they aim to capture the full potential of profitable trades.
The Pitfalls of Volatility Control and Overfitting
The podcast challenges the common practice of using volatility control mechanisms in trading strategies. The speakers argue that such mechanisms can reduce position sizes on winning trades and hinder the potential for outsized gains. They believe that volatility is not a reliable risk measure and that attempting to control it can introduce negative skew into a trading portfolio. They emphasize the importance of avoiding overfitting and the need to carefully evaluate and validate trading strategies. They argue against constantly adjusting positions based on changing volatility, advocating for a more conservative approach to leverage and risk management.
On episode 3 we cover a lot of ground with the two very sharp quants from Takahe capital. We cover numerous topics related to their trend following strategies, get into some deep discussion about their philosophy & generally try to unpack some practical tips for the rest of us!
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