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TRADE LIKE A HEDGE FUND - Harness the Power Of Technology to Gain Market Edge in One Hour per Day

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Presentation by Geoffrey Hossie of Pairtrade Finder to the Marbella Business Institute, 24 February 2017.

An introduction to Pair Trading and Why It Matters To You.

Published in: Technology
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TRADE LIKE A HEDGE FUND - Harness the Power Of Technology to Gain Market Edge in One Hour per Day

  1. 1. www.pairtradefinder.com TRADE LIKE A HEDGE FUND Harness The Power of Technology to Gain Market Edge – In One Hour/Day 1
  2. 2. www.pairtradefinder.com DISCLAIMER Event Driven Investor Limited, the owner and operator of www.paitradefinder.com and its software, investment and trading systems, portfolio update alerts, stop-loss recommendations, indicators, strategies, reports, articles and all other features of its products are provided for informational and educational purposes only and should not be construed as personalized investment advice. Its software, portfolio update alerts, stop-losses and analyses are based on SEC and other national securities regulators’ corporate filings, current events, interviews, corporate press releases, data from market data suppliers, third party software and its own opinions and calculations. They may contain errors and you should not make any investment decision based solely on what you read here. It should not be assumed that the software, investment systems, portfolio update alerts, stop-losses, methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses. The investments discussed herein are speculative, involve substantial risk, and are not suitable for all investors. Past performance is not necessarily indicative of future results; therefore, no investor should assume that future performance of any specific investment and/or investment and trading strategies made reference to in this information will be profitable or equal the corresponding indicated performance levels. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an individual investment portfolio. 2
  3. 3. www.pairtradefinder.com 3 “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul A. Samuelson, Nobel Laureate, Author Economics: An Introductory Analysis “The essence of investment management is the management of risks, not the management of returns.” Benjamin Graham, Author, The Intelligent Investor & Security Analysis OUR PHILOSOPHY
  4. 4. www.pairtradefinder.com Geoffrey Hossie • Co-Founder and Owner of Event Driven Investor Ltd., owner of Pairtrade Finder ™ trading software • 25 years of experience in mergers and acquisitions, private equity, investment management and corporate finance • Completed over 30 transactions with a combined value of in excess of US$5 billion in nine countries across four different continents as well as many corporate finance and strategic consultancy assignments for multinationals and global financial sponsors • As part of the Hachuel Group, acts as Senior Oil and Gas Advisor to the Quantum Group, an Africa-focused infrastructure and investment partnership, and previously served as a Partner then Managing Partner of H Oil & Minerals Ltd. (an Africa-focused junior oil & gas exploration and mineral rights investment firm). Geoff joined as a Strategic and Financial Analyst at the Hachuel Group, a multi- national European family office with approximately $300 million of direct, significant minority equity stakes in leading Spanish and French corporations, reaching Partner a few years later • Co-Founder and Portfolio Manager, together with Paul Cuatrecasas, of Claridge Special Situations Fund (FSA-registered equity hedge fund, performance record in Annex A) • Partner and Vice-President in Mergers and Acquisitions at The Monitor Group (a global private equity, corporate finance advisory and corporate strategy consulting firm with over 1200 employees in 28 offices worldwide and over $2 billion under management) • Began his career as a Financial Analyst at Salomon Brothers Inc in NYC, working in Richard J.Barrett’s Financial Institutions M&A Group • Degree in Honours Business Administration from the Ivey School of Business at the University of Western Ontario, Honours with Distinction. He also holds an Investment Management Certificate from the CFA Society of the UK and recently completed Level I of the Chartered Market Technician designation from the Market Technicians Association • Dual Canadian and UK citizen, fluent Spanish and French 4 ABOUT US – Event Driven Investor Ltd.
  5. 5. www.pairtradefinder.com 5 Paul Cuatrecasas • Co-Founder and Owner of Event Driven Investor Ltd. owner of Pairtrade Finder ™ trading software • Founder and CEO of the London-based corporate finance and M&A advisory firm, Aquaa Partners (www.aquaapartners.com) • Previously Founder and a Partner of the London-based investment banking firm, Alegro Capital, from 2003 to 2010. When Paul founded Alegro Capital in 2003 he also co-founded the Event-Driven hedge fund, Claridge Special Situations Fund, with Geoffrey Hossie and acted as Claridge’s Chief Investment Officer (performance record in Annex A) • Co-Founder and Managing Director of ARC Associates from 1993 to 2003. (ARC Associates was a leading independent London- based TMT mergers and acquisitions advisory practice with a full range of blue chip, private equity and entrepreneurial clients) • Completed over 40 M&A transactions around the world worth over $10 billion and over 50 corporate finance advisory and strategic consultancy assignments • Originated and structured over 15 private placements of equity capital raising over $500 million • Directed the ARC investment programme and achieved a historical professional investment track record over 50% IRR from 1994 to 2000 • Senior Associate with Arkwright Capital (ex-Bain & Co. partners), an M&A and Corporate Finance advisory firm in London (1991- 1993) and with GE Capital in their LBO and Restructuring Group in New York (1989-1991) • MBA from Columbia University where he was awarded the Roswell C. McCrea Scholarship Prize and a BA from Wake Forest University • Paul holds dual US and UK citizenship and speaks fluent Spanish ABOUT US – Event Driven Investor Ltd.
  6. 6. www.pairtradefinder.com 6 We are PairtradeFinder • We have created one of the world’s leading pair trading software platforms for global equities, ETFs, CFDs, Futures and FX, Pairtrade Finder™ • Our software was created 9 years ago and has been used by thousands of successful pairs traders, both professional and retail • Designed to allow any investor or trader to learn to make winning long/short trades consistently, with controlled and measured risk Bull market? Bear market? Sideways market? With Pairs Trading, it doesn’t matter WHO WE ARE
  7. 7. www.pairtradefinder.com 7 • Pair Trading Method • History of Pair Trading • Why It Matters to You • Is It Still Profitable? • Our “Secret Weapon” WHAT WE’RE COVERING
  8. 8. www.pairtradefinder.com • Pair Trading, also referred to as Spread Trading, Statistical Arbitrage, Relative Value Arbitrage, and Long/Short Equity has been used successfully among market professionals for over 60 years • Pair Trading, which involves going long and short simultaneously on a trade, is widely used among hedge funds, institutions and other market participants. The main attractions of pair trading are its controlled risk, low correlation to the market averages and ability to generate significant and consistent returns • Many, if not most, people think that you have to buy shares and just hold them to make money. Actually, this is not the only or the safest way to make money. We'll show you the secrets to start making more winning trades with hedged equity positions 8 WHAT IS “PAIR TRADING”?
  9. 9. www.pairtradefinder.com • Contrary to popular belief, a form of logic does run through the world’s stock markets. Most of the time, stocks are priced efficiently; that is, all information is discounted in a logical, relative manner • However, every now and then, the market does something unexpected and creates an inefficiency, or an anomaly. Stocks don’t buy and sell themselves, those orders are entered by people, people are driven by emotions, emotions cause irrational decisions and this emotional decision-making characteristic is multiplied exponentially when it comes to crowds of people • Stocks trade like several schools of fish, in which all schools roughly go in the same direction. Imagine each school of fish represents a certain sector within the stock market: - For example, US consumer goods shares, all other things being equal (e.g. news not affecting particular stocks), trade in a similar manner as the macro-economic factors affecting those companies are very similar 9 PAIR TRADING METHOD
  10. 10. www.pairtradefinder.com 10 • If for no good or explainable reason (such as news), two shares of this group , e.g. Coca-Cola (KO) and PepsiCo (PEP), diverge away from each other, there is an inefficiency created and an opportunity to profit: • Entering a Pair Trade: i) buy the relatively weaker share of the pair (e.g. PEP), the “Long Leg” and ii) sell short the relatively stronger share of the pair (e.g KO), the “Short Leg”, once the price ratio between them has diverged beyond a certain historic standard deviation level - Standard deviation is a measure that quantifies the amount of dispersion of a set of data from its mean i.e. in this case, how far out- of-whack the price ratio between two stocks has historically gone before reverting back to the mean PAIR TRADING METHOD
  11. 11. www.pairtradefinder.com 11 • The main benefit of pair trading this way is that your exposure to market and sector risk is significantly reduced, i.e. “hedged,” by holding both long and short positions in equal dollar amounts in a single or highly correlated set of market sectors • Pair Trading works because the relationship between two correlated stocks is much more predictable and reliable than the outright prediction of the direction of a particular stock • Pair Trading of equities works best in large/mega cap stocks with high liquidity: – Shares for the Short Leg must be available to borrow to sell short – Every round-trip pair trade represents four transactions, so commissions, bid/ask spread and slippage need to be minimized PAIR TRADING METHOD
  12. 12. www.pairtradefinder.com CONCEPT OF PRICE RATIO AND STANDARD DEVIATION 12 How Do You Find High-Probability Pairs for Profitable Trading? – Backtesting! ETF EXAMPLE
  13. 13. www.pairtradefinder.com 13 •Originally credited to Alfred Winslow Jones, an Australian immigrant to the USA, Harvard and Columbia educated, and Founder of the first “hedge” fund A.W. Jones & Co. •Jones married two speculative tools to create what he considered a conservative investment scheme - He used leverage to buy more shares, and used short selling to avoid market risk - He bought as many stocks as he sold, so market-wide moves up or down would be a wash on the total value of such a portfolio - The crucial question, then, would not be the direction of the market but whether the manager had picked the right stocks to buy and sell Source: Wikipedia HISTORY & GROWTH OF “PAIR” TRADING
  14. 14. www.pairtradefinder.com 14 A.W. Jones & Co. Track Record • Outperformed the best mutual fund over the previous five years by 44 percent, despite A.W. Jones & Co.’s 20% management-incentive fee • On a 10-year basis, Mr. Jones's hedge fund had beaten the top performer Dreyfus Fund by 87 percent • His long/short hedging success spawned the first generation of large private investment partnerships that were paid on performance – known as “hedge” funds, a term coined by Carol Loomis of Fortune magazine in 1966 while profiling Jones • That article and Jones’ success led to at least 130 hedge funds being established in the next 3 years, including George Soros’ Quantum Fund and Michael Steinhardt’s Steinhardt Partners Source: Wikipedia HISTORY & GROWTH OF “PAIR” TRADING
  15. 15. www.pairtradefinder.com 15 •Modern pair trading is generally credited to Morgan Stanley & Co. in the early to mid-1980s •Computer scientists Gerry Bamberger and David Shaw, and quant trader Nunzio Tartaglia all worked as a part of an ultra-secretive group that was in search of the Holy Grail of trading •Studied arbitrage opportunities in the equities markets, employing advanced statistical modelling and developing an automated trading program to exploit market imbalances •In 1987 the group made a reported $50 million profit for Morgan Stanley "It is rarely in the best interest of investment bankers and mutual fund managers to share profitable trading strategies with the public, so the pairs trade remained a secret of the pros (and a few deft individuals) until the advent of the Internet.” The Secret To Finding Profit In Pairs Trading, by Chris Stone, Investopedia •Recent studies have shown this style to deliver superior returns with lower risk than many other styles of trading, especially in volatile, bear markets •Many large hedge funds from around the world today continue to use Pair Trading as a means to deliver low risk, high reward returns to their investors •HOWEVER! - the Internet, advancements in computer power,trading technology, cheap real-time market data and the availability of leverage and low commissions for the retail investor through Contracts-For-Difference (CFDs) have levelled the playing field for the individual trader vs. the institutions •Retail traders have only ONE real advantage over institutions – their size. Use it to profit. Source: Investopedia, Pairtrade Finder HISTORY & GROWTH OF “PAIR” TRADING
  16. 16. www.pairtradefinder.com 16 •Equities Pair Trading is easy-to-learn and can generate significant recurring income with measured risk and with a small time commitment, and can be done from anywhere with a broadband connection •Any investor or trader that has at least $25,000 in a discretionary trading account (ex USA, Canada, Belgium and some other residents) can effectively deploy the strategy using Contracts-for- Difference (CFDs). Initial CFD accounts can be opened with as little as $2,500 (direct market access), but we recommend a minimum of $25,000 •A US, Canadian or Belgian resident investor or trader will need at least $100,000 in a discretionary trading account and Reg T or portfolio margin (minimum balance for a portfolio margin account at first-line brokers) or will need to use OPTIONS (we do not recommend using options unless you undertake expert training) WHY DOES IT MATTER TO ME?
  17. 17. www.pairtradefinder.com 17 •Typical pair trades, as researched and backtested by PTF, generally last 10-40 days each •A dedicated pair trader will typically have 10-15 pairs on at any given time (20-30 positions) •Generally about 10-20 end-of-day pair trades per month, about 1 per day or so •Trades usually entered in the last hour before US (or other) market close, or about 30 minutes after the market open •Total ongoing time commitment: approx. 20 hours per month, after learning your craft HOW LONG DOES IT TAKE AND WHEN DO I HAVE TO TRADE?
  18. 18. www.pairtradefinder.com 18 “We show that an equity pairs trading strategy generates large and significant abnormal returns…alphas of up to…36% [annually] for an equal-weighted portfolio.” - Empirical Investigation of an Equity Pairs Trading Strategy, Huafeng (Jason) Chen* Shaojun (Jenny) Chen** Feng Li, September 2012 “Pairs trading has grown into one of the most popular statistical arbitrage strategies. The first extensive academic research on pairs trading was conducted by Gatev et al. (1999,2006), who examined the return and risk characteristics of a simple pairs trading strategy using CRSP data over the period 1962 to 2002. They documented economically and statistically significant profits of around 1% per month [unlevered].” - Mean Reversion II: Pairs Trading Strategies, Deutsche Bank, Shuo Qu et. al.,16 February 2016 WHAT CAN YOU EXPECT TO EARN?
  19. 19. www.pairtradefinder.com 19 …or has the opportunity been arbitraged away by supercomputers and HFT? An index summary (see right) based on institutional reward/risk targets (much lower volatility and total return than typical retail risk tolerances) shows that the strategy continues to be consistently profitable Source: Barclay Equity Market Neutral Hedge Fund Index EQUITY MARKET NEUTRAL HEDGE FUND PERFORMANCE IS IT STILL PROFITABLE?
  20. 20. www.pairtradefinder.com 20 “Figure 21 shows the relationship between the average monthly return of the final pairs strategy versus the VIX. It is clear from the graph that there’s a positive relationship between pairs trading profitability and market volatility. In line with the properties of mean-reversion strategies, pairs trading tend to work better in periods of high volatility…the results indicate that pairs trading offers an uncorrelated source of alpha.” Mean Reversion II: Pairs Trading Strategies, Deutsche Bank, Shuo Qu et. al.,16 February 2016 Deutsche Bank’s latest review of an enhanced pairs trading strategy from 2002 – 2016 (enhanced for fundamental analysis feeds and news feeds) and they conclude: IS IT STILL PROFITABLE?
  21. 21. www.pairtradefinder.com 21 From a dedicated real-money Pair Trading signals service: HedgeTEC SAS’s Pair Trading signals service running a real money account (audited) and trading both a straight equity (Reg T margin, about 3:1 leverage deployed) and a CFD (about 6.6:1 leverage deployed) account produced the following results for June-Dec 2016 (seven months): Source: HedgeTec SAS Long/Short Account 2016 Performance IS IT STILL PROFITABLE?
  22. 22. www.pairtradefinder.com 22 A reasonable assumption for a well-researched, diversified, properly position-sized and risk managed retail pair trading portfolio might be in the range of 15%-40% per annum, depending on leverage deployed et. al. SEE DISCLAIMER Account Size Illustrative Potential Annual Profits $50,000 $7,500 - $20,000 $100,000 $15,000 - $40,000 $150,000 $22,500 - $60,000 $200,000 $30,000 - $80,000 $500,000 $75,000 - $200,000 $1,000,000 $150,000 - $400,000 WHAT CAN A PRO PAIR TRADER EXPECT TO EARN?
  23. 23. www.pairtradefinder.com OUR SECRET WEAPON… 23 • What Is It? – Those of you with retail trading and/or investing experience have probably tried a ton of not-so-successful trading tools or investment newsletters that didn't really work over the long term – For pair trading, finding the right pairs to trade, not just once but consistently, is critically important to ensure your results will stick around for longer than just a few months i.e. consistent profitability • Professional Pair Traders know the key to successful trading is having the right software platform for analyzing and signaling potential trades HOW DO I LEARN TO PAIR TRADE?
  24. 24. www.pairtradefinder.com 24 • Many novice traders will attempt to use free websites, Excel spreadsheets and other boot-strap methods in attempting to trade equity pairs • A serious trader, however, is not afraid to pay for an analytical program that will signal him or her into the winning trades to stay ahead of the game – investment in “edge” is what separates the kids from the adults in the highly competitive trading world • When choosing a Pair Trading software program look for one that can: – Easily load many potential pairs and back-test them across a range of parameters – Scan for correlated and co-integrated pairs and historic profitability and a smooth equity curve – Generate real-time or near-real-time buy and sell signals, on screen and on Email – Show detailed graphical visualizations of the relationship between securities and the backtest results – Allow high-quality data feeds to improve backtester and trade signal accuracy – If desired, offer greybox trading functionality to a market-leading broker to save time and increase execution speed and accuracy …PAIR TRADING SOFTWARE
  25. 25. www.pairtradefinder.com Our Secret Weapon 25 •Industry-leading pair-trading software for online traders •Our trading software works and is EASY-TO-LEARN AND USE •Sold over 2,000 Lifetime Licenses worldwide, downloaded over 6,000 times •Created over more than eight years by a team of developers and finance professionals formerly with Morgan Stanley, Salomon Brothers Inc and GE Capital •Truly global platform, automatically imports over 1,000,000 different instruments from over 50 exchanges around the world, including stocks, ETF’s, CFDs, options, futures, commodities, forex •Customize and back-test your own pair trading system on ten years’ worth of historical data to give you the confidence in your system’s profitability and robustness PAIRTRADE FINDER™ v3.27
  26. 26. www.pairtradefinder.com 26 1. A market-leading software platform to quickly and easily screen, backtest and analyze profitable pair trading opportunities by correlation, co-integration, average profit per trade and many other metrics 2. Ability to generate real time audio and email buy and sell alerts on your selected pairs 3. Integration to FREE Yahoo Finance 15-minute delayed data (depending on exchange) covering NYSE, NASDAQ, LSE, ASX, TSE and many others worldwide 4. Ability to seamlessly integrate to an institutional- quality IQ Feed real-time datafeed, if desired (extra cost) 5. A 3-hour 11-Lecture Video Training Course included 6. A discount on our upcoming new products, PTF Pro™ and PTF Signals™, both of which will be monthly or annual licenses 7. Online support, usually 24 hour response 8. Other trading tools and resources to make you a better pair trader (example trade journal, position sizing worksheet, library of resources, etc.) 9. 30 days refund policy if you're not satisfied, no questions asked PAIRTRADE FINDER v3.27 What We Offer
  27. 27. www.pairtradefinder.com 27 • Let’s Recap. In this presentation you have been introduced to: – Pair Trading Method. Why and how you can make more winning trades with less risk, thus protecting as well as growing your trading account – History of Pair Trading. How it started and why it is so successful – Why It Matters To You: How anyone with $25,000 can use this system to successfully trade and what reasonable profit expectations may be for a disciplined pair trader – Pair Trading Software. The right software platform is often the difference between success and failure WHAT YOU SHOULD DO RIGHT NOW
  28. 28. www.pairtradefinder.com 28 You can also download for free our Trade Like a Hedge Fund eBook that provides 11 Tips to learn the basics of profitable pair selection and portfolio management www.blog.pairtradefinder.com DOWNLOAD OUR FREE EBOOK
  29. 29. www.pairtradefinder.com 29 Go to our blog for ongoing educational updates, example pairs and some trade- by-trade results www.blog.pairtradefinder.com VISIT AND FOLLOW OUR BLOG
  30. 30. www.pairtradefinder.com 30 • If you’re interested in these rules and you’re committed to becoming a successful trader, without having to pay expensive fees, then download a 30-DAY FREE TRIAL of our pair trading software platform at www.pairtradefinder.com • If you want to begin a dialogue with us, or if you have any questions about this presentation or our software, then please send us an email at admin@pairtradefinder.com • We wish you consistent profits! THANK YOU FOR YOUR TIME AND KIND ATTENTION WHAT YOU SHOULD DO RIGHT NOW
  31. 31. www.pairtradefinder.com 31 ANNEX A: Claridge Special Situations Fund Track Record

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