Hourly arbitrage is a good strategy
Is it possible to earn a stable income in today's market environment without taking a lot of risk? It sounds a bit optimistic, but we will try to show that it is possible. How does it work? Not at the expense of portfolio management in its classical sense. There is such a thing as arbitration.
A and B were sitting on a pipe...
There are predictable situations in the market where an event A with probability 80% entails an event B. And so if we isolate such situations and hedge everything else, there is an opportunity to earn a steady income.
I would like to dwell a little bit on one program, which has already been successfully tested on the market in Europe and the United States, and which is also known in Moscow. This program uses two immutable circumstances. First - There is a six-hour difference between Europe and America. И second - The U.S. market, being half of the entire world market by capitalization, greatly influences how Europe opens the next day. When it is 11:30 in New York, the British and French markets close in Europe, and then Germany half an hour later. Now, if America rises from 11:30 to the end of the day (Fig. 1), there is a higher probability that Europe will open on the plus side tomorrow: the European indexes will open above the previous day's open price. This makes sense logically - if something positive was happening in the world since 11:30, America reacted uninterruptedly and adequately to it, and Europe could not, Europe was sleeping. Therefore, it would react to all the night news at the opening, and it would rather go up. And that's 4 out of 5! So there you have it: event A - America's move from 11:30, and event B - Europe's reaction tomorrow.
Figure 1. Movement of the S&P index for January 2, 2002.
America - Europe = +
Now the question is how to make money on this steadily. A certain transactional chain is built, and it consists of the following. Each day begins in the money market - without any action. The time is 3:50 pm. Ten minutes before America closes, a decision is made. If by that moment the day has convincingly shown to be negative, there's no need to enter the market - we wait for the rest of the day. If it's a day, the same thing. This is not because of some brilliant foresight, but because the almost complete daily picture is revealed after the fact. If the day is clearly positive, then at 3:50 p.m. to purchase U.S. mutual fundsThe European shares can no longer be bought, the markets are closed, but you can buy a mutual fund. It's no longer possible to buy European shares, the markets are closed, but you can buy a mutual fund, and there are a lot of such funds - about 800.
Another point. The vast majority of these mutual funds, about 90%, are not traded on the exchange every minute, but are priced discretely - once a day. And they are priced at the end of the trading day in America, i.e., after being purchased in Europe. What does a manager of such a fund do? He takes the portfolio, evaluates it at the close of the respective market (and the close was at 11.30 in the USA), and divides by the number of issued units. This is how the price of one unit is determined. Accordingly, we buy in Europe at prices that are frozen for us at 16:30, if the American morning news convince us of the potential profitability of such an investment.
Buy and live in peace
So what happens tomorrow? Ideally, having made a little money on the opening, the best thing would be to sell it all and continue to enjoy life. But it's not that simple. There must be a two-day netting on the deal, and you have to sit and wait - that's how the market works. To avoid the trader's headache for two whole days - in this case one can only predict the opening, and then the market is ready to act as it pleases - we recommend hedge on futures market.
Therefore, as soon as the fund is purchased at 4 p.m., it is necessary to immediately order the futures broker to buy the opposite futures position exactly at the 9 a.m. opening of Europe (at 3 a.m. New York), for our basic and hedging assets are one and the same thing. So, we buy an index fund and hedge it with a futures on the corresponding index. So what happens? By taking a small predictable profit, the arbitrageur neutralizes all market movements. If it goes up, the futures go down - and you from the moment you took the small profit. Conversely, if the market, after opening, slides down, the futures go up; the player sits in a synthetic cache. Two days later, it is all sold - until the next opportunity arises. Similar situations occur about once a week, with the opportunity to earn in this way from 0.5% to 1%.
Losses are not excluded, but also small. In general, the rule of thumb is that Europe has a 4:1 chance of opening up after good American news. Yes, it happens, even though America has a good day, Europe opens down (if something happens overnight). Although don't be afraid of a big change right off the bat - for example, even on the morning of September 12 last year, Europe opened only 4% below its closing level. And only then did it start to steadily.
Score 4:1
Using this methodology, it is impossible to earn a lot, but you can't lose much either. If the day is negative, you should not enter the market. Money is made on positive days. There is an asymmetric filter and we are slowly but steadily moving forward, only sometimes getting nervous because of the unreported market reactions.
What are the main parameters of profitability and risk of this program? In a falling marketWhen there are not many good days, the average yield is 15-17% per annum. When the market grows and positive news, respectively, more - 20-25%. This is the range in which the yield fluctuates. Risk parameters - 4-5%, the maximum amplitude from the local peak to the local bottom is 5%, the average downward - 0.5%.
The return/risk ratio is four times higher than average. This is not surprising, though; our world is built on a 4:1 ratio. Hourly arbitration - Not playing on market dynamics, not trying to predict. It is the use of very clear and understandable correlations between financial instruments that allow you to turn a 50:50 probability into an 80:20 one in your favor.
Taking care of leftovers
This method has one interesting feature. The worse the world is, the more the market swings, the more it fluctuates. trader better. For example, America closed 0.5% up, hence Europe will open slightly higher, and earnings are small. If the market is 8% down, 4 up, 6% down, 3 up, what do you get in reality? 8% down - sit, 4 up - earnings coming in, 6% down - waiting, 3% up - making money again. What do investors do in this situation? In moments of market uncertainty, they get out of stocks and other risky instruments and invest in bonds, etc. And the methodology discussed practically allows them to earn more.
And lastly, and especially relevant to the Russian market. The system makes it possible to manage not only long money, but also short money. For example, some corporate or personal reserves have formed, some balances on accounts, in general, money lasting a month or more, which, in one way or another, are idle. They can be handled perfectly well for a combination of two reasons. It is a low short-term risk and 100 percent liquidity, unlike many hedge funds. The maximum time delay with the return of the money is three days, if you are forced to make offsets. And therefore the system is best considered as a investment algorithm, and, which is popular in many Russian structures, as the original method of managing short-term balances.