This presentation was delivered by QuantInsti director and co-founder Mr. Shaurya Chandra at a workshop on 'Profitability Analysis and Money Management of Quantitative Trading Strategies' organized at Finbridge Expo 2015, Mumbai on 14th March 2015. This event was India’s first ever integrated financial service providers’ exhibition that brought together top mutual funds, insurance companies, leading brokers, banks or financial institutions, fund managers, decision makers along with thousands of retail financial market participants, distributors, investors and vendors. The presentation talks about best practices for profitability analysis of a quantitative trading strategy and also explains how to manage money and your portfolio. Following are the topics that are covered in this presentation, 1) Some Hard Truth about Trading… 2) Building a Diversified Portfolio? 3) Trade-offs in the market 4) Some typical Parameters to be estimated… 5) In-Depth Strategy Analysis 6) Position Sizing 7) Methods that Don’t Work 8) Why They Don’t Work 9) Portfolio Management This presentation will help you in analyzing and improvising your current quantitative trading strategy resulting into higher profits.

1. Performance Evaluation &
Money Management
Finbridge 2015
Shaurya Chandra
14th March, 2015

2. Some Hard Truth about Trading..
• You might get some
stock trading tip here
& there…...
• But, it takes a real hard
work to make profit
consistently!!

3. Building a Diversified Portfolio?

4. Trade-offs in the market:
• Returns vs Risk
– How high the risk you want to take?
– Is low risk arbitrage for you or the high risk trend following is
your cup of tea?
• Hit Ratio Vs Average Returns Per trade
– Can you handle the string of losses before you see the light of
dawn?
• Quick Returns vs Maximum Drawdown
– Do you want big returns (by leveraging your position) and
susceptible to big draw downs, or smooth curve of returns??
“Choose what pain you can live with, rather choosing what
gain you want to make”

5. Some typical Parameters to be estimated…
• Total Returns (CAGR)
• Hit Ratio (i.e. Success Ratio)
• Average Profit per Trade
• Average Loss Per Trade
• Maximum Drawdown
• Maximum Consecutive losses
• Volatility of Returns

6. • Absolute Risk-adjusted Return Measures
– Sharpe Ratio
– Sortino Ratio
• Relative Return Measures
– Up-Capture Ratio / Down-Capture Ratio
– Up-Number Ratio / Down-Number Ratio
– Proficiency Ratio (Up/Down Percentage Ratio)
6
In-Depth Strategy Analysis

7. • Sharpe ratio = (excess return over risk free rate) / (standard
deviation of excess returns)
It is a measure of the excess return per unit of standard deviation in
an investment asset. Sharpe ratio provides very useful
information regarding the return of an asset for a given risk.
Limitations
– Based on historical data , assumes “Future would be same as
the Past”
– Poor at estimating tail risk – Normal Distribution Assumption ,
hence no differentiation between +ve and –ve trades
– Doesn’t account for Draw-downs (leading to low volatility) and
transaction costs
7
p
fp
σ
RR
ratioSharpe


Absolute Risk
Adjusted
Return
Measures
Relative
Return
Measures
Strategy Analysis

8. • Sortino ratio = (return over target return) / (downside risk, i.e.
semi deviation or variance on the downside only).
<R> = Expected Return
Rf = Risk Free Rate
σf = Standard Deviation of
Negative Returns
Unlike Sharpe ratio, Sortino ratio does not punish high variance if
the returns are on the upside.
8
d
f
ratioSortino

RR 

Strategy Analysis
Absolute Risk
Adjusted
Return
Measures
Relative
Return
Measures

9. The Flaw of Averages

10. • Calmar ratio = (return) / (maximum drawdown). Generally
quoted for the last 3 years
• Sterling ratio = (return) / (absolute(average drawdown – 10%)).
Generally quoted for the last 3 years
10
Strategy Analysis
Absolute Risk
Adjusted
Return
Measures
Relative
Return
Measures

11. • Up Capture Ratio = (fund’s return when benchmark return
increased) / (benchmark’s return when benchmark increased)
• Up Number Ratio = (number of period when fund’s return
increased when benchmark return increased) / (number of
periods when benchmark’s return increased)
• Up Percentage Ratio (Proficiency Ratio) = (number of period
when fund’s return outperformed the benchmark when
benchmark’s return increased) / (number of periods when
benchmark’s return increased)
• Likewise Down Capture Ratio, Down Number Ratio, Down
Percentage Ratio
11
Absolute Risk
Adjusted
Return
Measures
Relative Return
Measures
Strategy Analysis

12. Position Sizing
• Ad hoc: trade no larger than lets you
sleep at night
• Margin plus drawdown
• Fixed Fractional
• Fixed Ratio
• Kelly’s Criteria

13. Methods that Don’t Work
• Martingale methods: increase position size
after a loss; decrease it after a win.
• Anti-Martingale methods.
• Equity curve methods: increase size when
your equity curve falls below its moving
average (“reversion to mean”), or increase
size when you cross above the moving
average (“trade the trend in equity curve”).

14. Why They Don’t Work
• Martingale and equity curve methods assume
dependency between trades.
• In most cases, trades are independent of each
other. The odds of the next trade being a win are
not related to whether the last trade was a win or
a loss.
• If trades are independent, you can’t determine
the likelihood of the next trade being a win or a
loss based on the previous trade.

15. Kelly’s Criterion for Portfolio Management
It is a formula used to determine the optimal size of a
series of bets.
Focus : Long Term Capital Growth
Kelly % (f) = ((B + 1)*P -1)/B
Where,
f = optimal fixed fraction
P = Winning Probability
B = Win/Loss Rate
( Average Gain on +ve Trades/ Average Loss on –ve Trades)
15
Portfolio Management

16. Some Advice!

17. Thank you!
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