Bahadur’s final lesson
He now has 14 models, seven that he applies across a group of diversified markets and seven that he applies to stock index futures specifically. The majority of his trades are short-term with 20% being exited within a day and 90% within two weeks.
"They are all short-term systems. Only one system catches long-term trends," he says. "We’ve got some momentum models, some short-term trend-following and some pattern recognition."
Each new model has improved his risk-adjusted returns. "You want to have the models balancing each others’ weaknesses. A robust system will have large drawdowns, that is just the nature of the beast, so the only way to mitigate those large drawdowns is to define other systems that can complement their weaknesses and mix them into sort of a soup that [produces] that perfect outcome."
Bahadur even hired an outside programmer to help find the perfect balance of all his models. "He delivered a custom program that allows me to mix and match [my] algorithms."
Bahadur says diversification is key. "You want to have diversification across markets, you want to have diversification across timeframe and you want to have diversification across systems. I have all three," Bahadur says.
After a long trial-run Bahadur is now looking to take on customers. His six-year proprietary record (2005-2010) has produced a 26.10% compound annual return with a worst drawdown of 24.64% and 1.2 Sharpe ratio. He will use half the leverage he used previously to produce those returns in trading customer funds. The 2011 returns are perhaps his strongest, earning 24.21% through August using half the previous leverage.
The program is not only 80% systematic, but also 80% automated. He allows 20% discretion, perhaps from Raschke’s influence.
"You want to take advantage of the market when your systems can’t. Systems are dumb things, they look for certain things and that is all they know what to look for," Bahadur says. An example occurred this past August in the E-mini S&P 500. He saw indicators from multiple timeframes converge at a point on Aug. 2, signaling weakness. "That is something that I could not have made a computer program catch," Bahadur says. His automated systems produced a sell signal a few days later, but he caught a large move using discretion that the system missed.
Bahadur is concentrating full-time on his CTA business and is thankful for the lessons learned from Raschke.
"More than anything else, I learned how a professional comes back from a large drawdown. When your back is against the wall, how you play the game. It is a sight to behold when you see that happening. It is something that would have taken me 10 years to learn and internalize, and I got it in three," Bahadur says.