Ewan Kirk talks about the science of trading in his recent pod chat. Ewan Kirk is the CEO and co-founder of Cantab Capital Partners, which is a quantitative hedge fund with 4.5 billion USD AUM and based in Cambridge, England. Cantab “employs a multi-strategy, multi-asset approach within the systematic space” according to the fund’s website.
Ewan Kirk holds a Ph.D. in mathematical physics and he is also a computer programmer. He is a quantitative investor like James Simon.
“Cantab employs a multi-strategy, multi-asset approach within the systematic space”
In the quantitative hedge fund space, Ewan Kirk talks about the science of trading and he argues that mathematics and computer programming are both necessary for successful quantitative trading.
“It’s sort of useless being a mathematician without being able to computer program” said Ewan Kirk.
Ewan Kirk talks about the science of trading using a quantitative strategy.
Quantitative hedge fund expresses their view through computer programming. Speaking about the essence of a quantitative hedge fund being a computer program Ewan Kirk likens the skill of being able to code as a novelist who expresses ideas and views through language. “You express your views or your ideas through computer programming” said Ewan Kirk. “So I was a reasonably good computer programmer, I had a background in quant and Goldman very kindly took a punt on me” said Ewan Kirk.
“It’s today’s literacy (programming), that strand runs through my entire career but also runs through what we do at Cantab. I just spent the last two or three weeks programming up a piece of infrastructure” said Ewan Kirk. “There’s no rest for the wicked as they say” he added.
“It’s sort of useless being a mathematician without being able to computer program”
Ewan Kirk talks about the science of trading and what he thinks made him successful
“I think partly the reason why we may become more successful was more to the scientific approach to investment and statistics. I look back at these and look at the old tattered books about average true range and breakouts and it seems like the dark ages” he said.
“We are thinking at a much more statistical sense, more scientific. I believe that a more scientific approach to investing, a more rigorous statistical approach to it, I believe that’s better than just a rule that happens to have worked in the past” said Ewan Kirk.
“Even though we started in 2006/2007, I remember people asking me, particularly in the States, why do you weight your positions by risk?” – Ewan Kirk
Ewan Kirk talks about the science of trading concerning why he assesses positions by risk, instead of taking a constant lot quantity.
“Even though we started in 2006/2007, I remember people asking me, particularly in the States, why do you weight your positions by risk? Why don’t you take a constant lot of quantity? That’s just madness, in a world where we have a contract, a wheat contract, which is maybe $20,000 and the nickel contract is $250,000, it’s just an insane way of doing it, but it was the tradition” said Ewan Kirk.
Ewan Kirk talks about the science of trading in terms of losses being part of the game
“People are desperate to invest in something that never loses money. And that is of course why Bernard Madoff existed” he said.
I try to come up with a strategy that never loses money. But of course, we all want that. But the reality of almost all investing is that if you’re really good or really lucky and you’ve got a very long track record, maybe 20-30 years and you’ve never changed your strategy over that period – which of course none of these things are true for anybody – maybe the best you can hope for is a Sharpe Ratio of 0.8/0.9, maybe 1. Broadly a good investment strategy is something over a long period that has a Sharpe Ratio of 1. Investors should want that” added Ewan Kirk.
Ewan Kirk’s definition of great is 20% volatility with an average gross 20% annual return.
“But that does mean that every two years, it’s going to have a drawdown of 15%, statistically, every four years it’s going to have a drawdown of 20%. This is just what happens. Even if the system truly has that return profile, it’s going to experience those kinds of drawdowns and it’s going to experience losses” he said.
“the expectation of losses is something that everyone should build into their investment process at all times” – Ewan Kirk
Ewan Kirk talks about the science of trading losses using the Monte Carlo simulations
This is used to model the probability of different outcomes and understand the impact of risk and uncertainty in prediction and forecasting models.
“I have a little spreadsheet that I sometimes show to clients when discussing this, which simulates five years of daily returns from something which is a 20% return, 20% volatility process, effectively a Monte Carlo simulation” he said.
“And every time you press F9 on this spreadsheet it draws another graph on another realization of this random but positive process. You don’t have to press F9 very often before you get a history that loses money in a straight line for five years which has a 40% drawdown. Remember this is something that’s guaranteed to make 20% per annum over a long enough period. So the expectation of losses is something that everyone should build into their investment process at all times” he said.
Ewan Kirk talks about the science of trading in the context of systemic trading
This is also known as mechanical trading, which entails methodically making trading decisions. Systemic trading can be done manually or using systems. The industry is full of people claiming that they have the best trading system, according to Ewan Kirk.
“But in fact, finance is dominated by randomness, randomness is everything. And so because randomness is everything, you need to be uncertain, you need to have a lack of conviction in certain things because you want to be able to prove that things are wrong” said Ewan Kirk
“So when we come up with a new strategy or new idea or new trading system, what we are trying to do is find out what’s wrong with it” he added.