What happened in Q1 2023? An overview of our performance
What happened in Q1 2023? An overview of our performance
An in-depth look at how we did, what was good, and what wasn't
We have completed the Q1 competition and announced the winners on Tuesday. Next week we will restart with the Q2 competition, so in the mean time we would like to present to you our Q1 performance. Fully transparent, as always.
When we were starting the fund very often we would hear feedback that our returns during 2021 and 2022 were “too good to be true”. To most people the 72% we made last year (and 160% overall) looked unrealistic and unattainable. It seemed like we never lose money, which is to some people an immediate red flag (and justifiably so).
Well, we certainly can lose money, as no trading strategy is 100%. The overall performance in Q1, during 8 weeks of trading, was negative. It was our first negative quarter since we started doing this back in May 2021. The overall return of the BASON last quarter was -13.4% (or -14.9% net, accounting for fees). Figure 1 shows how it went week after week.
The result is not that surprising given the market conditions we were trading in and making predictions for. In other words, we faced this before.
How so? Didn’t we used to have double digit numbers almost all the time over the past year and a half? No, not all the time. Let’s unpack this.
Trading in Kangaroo markets
The drawdown is primarily a consequence of a consecutive eight week period when markets were scrambling to find direction (higher one week, lower the next, and then repeat), with the weekly and intraday high-low swings being quite volatile. These types of market environments are usually called kangaroo markets (as opposed to bull or bear markets), as it is increasingly difficult to capture the right directional signal, even with wisdom of crowds methods like the one we use.
If you recall our performance in Q4 2022 it had a very similar feel to it. Markets scrambling to find direction, intraday volatility being wild, and us being pushed out of winning positions far too often to make a decent return.
Pay attention to that period, starting from October 2022, on Figure 2 below. It shows weekly directional moves between Friday close and Wednesday open (when we typically place our trades). Notice how we tend to deliver top performances whenever there are three or more consecutive weeks of same directional moves, whether up or down. This was the case throughout 2021, when the intraday volatility was also quite low. Low intraday and intraweek volatility also meant that our condors profited heavily.
In 2022, once the bear market started, notice a sharp increase in intraweek volatility. However, even in such volatile times, the trends were quite obvious (notice April to June, or July to August, or September). However, since October 2022 we are in a period of directional jumps coupled with higher volatility. This has continued in 2023 and has been the leading cause of our lack of performance during Q1, similar to our relatively lower performance during Q4 2023.
With this in mind, take a look at the BASON’s prediction performance in Q1 on Figure 3. It was much less precise than average. Notice how jumpy the markets were and how our ability to capture where they would end up clearly subsided. Only in Q4 last year was our prediction performance so indecisive.
Figure 4 compiles our Q1 2023 trading performance with all the previous weeks during our live trading period, from before we started our fund. Notice the clustering of negative returns happening during particularly volatile periods, and especially in Q4 2022 and Q1 2023.
Our best performances, which drove the majority of the returns in 2021 and 2022, came during periods when markets engaged in a strong up trend (like during May to July 2021, October and December 2021) or down trend (like during April, May, and June 2022, or September 2022). To see what exactly we mean by this, observe the price action for S&P500 in Figure 5. We made double digit returns (45%, 38%, 15%) during three very strong market moves, in both a bullish and a bearish environment. But in between those, whenever markets scrambled to find direction, we had to endure losses.
Notice in particular the price action over the past two quarters, from October 2022 until March 2023. Apart from a bullish pattern in January (when we didn’t yet start trading), it was mostly rangebound trading with high spikes of intraday and intraweek volatility.
If you think about how we do this, using a network-adjusted wisdom of crowds approach, it makes sense that signals underperform during periods of volatile markets. Traders and market enthusiasts that participate in our competitions have too much conflicting information and this leads to too much noise that our network adjustment cannot fully correct for. We still get the signal right from time to time, but not as much as we usually do.
So in periods like these, we are forced to accept losses, and if the period persists for too long, adjust our exposure and limit the range of instruments we trade with, as we have done in our final trading week in Q1 2023.
Improvements
Obviously, we do not have to stand around passive and reach our 5% risk limits each week. We can and did react. We did an in depth overview of each of our trading strategies and components and noticed a few things that affected performance.
Most importantly, we noticed that in such periods our iron condor strategies tend to underperform. They have underperformed throughout the past 8 weeks as well, so we will temporarily drop this strategy and focus only on direction.
The reason for iron condors’ poor signaling is simple. We position 50% stop-losses on these positions and during highly volatile intraday trading sessions we get stopped out often. Dropping the stop-losses is not an option as it would expose us to even bigger losses.
We therefore performed a backtest analysis where we removed all condor positions and only traded directional options (calls and puts), plus our standard macro positioning. We also applied our auxiliary BASON signal, adapted towards kangaroo trading environments (where we use a set of momentum tracking indicators to fix the BASON signal if it goes in the other direction during second day trading).
With hindsight, both of these strategies would have been more optimal than the standard BASON over the past eight weeks. The auxiliary BASON would have helped turn two weeks positive, which would have lowered the losses, while the no-condor BASON would have been the only strategy that would turn out (slightly) net positive year to date.
This just goes to show how difficult it would have been to make money in this trading environment regardless of the strategy used. Nevertheless, from this we can draw several important conclusions that will undoubtedly help our trading from Q2 onwards.
This adjustment gives us confidence that the performance of the fund will improve once we pick up another strong trend and the BASON’s network mechanism realizes its full potential.
Until then, we will have to live with the current losses for a bit longer than we expected, as our trading size will be restricted. Or until there is another strong trend we can quickly ride back to our double digit returns.
We’ll keep informing you of our progress. Thanks for following!
DISCLAIMER: Neither the survey nor any of the contents of this website can act as investment advice of any kind. The results of the survey need not correspond to actual market preferences or trends, so they should be interpreted with caution. Oraclum Capital, LLC (Henceforth ORCA) is a management company responsible for running the ORCA BASON Fund, LP, and for organizing a survey competition each week, where it invites the subscribers to its newsletter (this website) to participate in an ongoing prediction competition. The information presented on this website and through the survey competition should under no circumstances be used to solicit any investment advice, nor is it allowed to be of commercial use to any of its readers. The survey and this website contain no information that a user may use as financial or investment advice. All rights reserved. Oraclum Capital LLC.