Sunday, June 13, 2010

RVS Overview and M3 System Philosophy

I wanted to publish this post as a follow up as to some previous posts that opened up the discussion of approach and philosophy behind my work and also many requests for more information. So, here is an overview of what RVS is about and what my approach is for modeling and markets.

First, some background. The systems are the backbone for several hedgefunds, and also run institutional and professional money on a CTA basis and via license though m3TradingServices. If you find yourself wanting to find out more, contact us directly via email The models here are proprietary and owned, designed, developed and maintained by m3 alone. They are NOT available for distribution of any kind. Currently, the systems are trading substantial live real money allocations. Additionally, the daily models support extremely large position allocations and use a MOC approach for cash markets. They are called RVS – Relative Value Systems and HLA systems.

These powerful models use non correlated measures of trend, rich and cheap and use dynamic reduced risk entry and allocation methods to build positions. There are no standard indicators used in the models save some references to an average here or there. While we have many other models, the RVS models are the work horses and are amazing for tracking the markets on a long-term basis. We use them to execute live trades, as controllers for other models and/or as well as general market indicators. We have built these models for most of the global major market indexes and focus live capital by applying it to the most liquid and easy to access markets – either cash or futures.

The philosophy behind RVS is based on single risk unhedged transactions. My belief is that the market pays for risk taking not risk avoidance. Therefore, all of my work is based on precise risk taking and measurement. I believe that standard quantitative analysis is unreliable and selective. Quants generally like correlations, and our markets are not fond of correlations anymore. Additionally, de-leveraging makes a mockery of theoretical relationships as I am quite sure it will of the fascination with HFT. Therefore, this work concentrates on risk taking in the natural sense and does NOT use stops.

Rather the approach is to use precise entries and reduced risk allocation methods with PL targeting for risk management. PL targeting is much more effective than stops and enabled 47% returns on an account basis for our futures systems in May while many were getting stopped out on nearly every trade. I believe that the markets are reverting to a more organic state and will compromise most computers and standard investment methodologies – including buy and hold, multiple asset class and market based diversification and standard and exotic hedging. Those approaches to taming these markets, in my opinion, are unlikely to achieve success. Rather a focus on precise risk taking and organic trading will work.

I think its back to the basics and that that is exactly where the market participants as a whole are not looking or unable to look. To see this in action simply look at the portfolios of insolvent entities like JPM and Goldman Tax. They are all based on hollow correlated and theoretical risk. It is impossible for them to get back to basics without going bankrupt - we need to remember that when the market senses a weakness it overwhelms it. I suspect we will see that happen and that these names among others will suffer a much worse likeness of the BP saga than can easily be imagined. This is why my work concentrates on pure risk taking and is not interested in anything other than price. Theoretical valuations, hedged risks, diversification and correlated price movements are not the focus and will never drive a trade for my systems. These traits simply introduce new risks by facilitating false assurances and confidence on risk assessment and analysis and ultimately forment complacency.

Below is a chart I posted on the 9th of June...I would like to point out that we are at 1090ish area for the ES...and that is quite near the target area for the ES Daily Swing System...the trigger could still take some time to develop or occur as soon as next week...things look like they are about to get interesting...I will keep you posted.

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