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Hello All!
We're looking for feedback on a proposed new Alpha selection filter. The Probabilistic Sharpe Ratio would give us another way to measure the results of backtests submitted and provide funds looking to license Alphas with more information about algorithm performance beyond our current metrics. If you have suggestions please clone the backtest, examine the notebook, and give us your thoughts!
Thanks,
Jack
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Frank Norman
This would lead to higher performing Alpha Streams. I would add it to the arsenal.
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Andrew martin czeizler
Is this being included in the backtest metrics?
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Jack Simonson
We haven't included it yet into the backtest metrics, but it's something that we're considering as well.
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Tim Bohmann
I would like to see this in the backtest metrics. This would be a quick "sanity test" when backtesting.
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Pangyuteng
Glad to see that Quantconnect seems to be agile and willing to update methods for their algo selection. I also find it comforting that Lean is opensource, so I can check the implementation and their test cases. :)
SPY notebook SR: 0.836, PSR: 50.000% Lean SR: 0.900, PSR: 41.185% ---- SHY notebook SR: 1.237, PSR: 68.901% Lean SR: 1.224, PSR: 69.799% ---- QQQ notebook SR: 0.910, PSR: 52.476% Lean SR: 0.990, PSR: 49.063% ---- AMZN notebook SR: 1.218, PSR: 83.669% Lean SR: 1.339, PSR: 78.661% ---- GE notebook SR: -0.458, PSR: 10.897% Lean SR: -0.306, PSR: 0.159% ----For those that want to do some quick and dirty backtest or optimization/investigation in research, please do keep in mind the inevitable computation differences between LEAN and simple PSR computation in notebook. I think this is one of those little but important things most engineers/data scientists have to deal with when working among different environments. Anyways... per Alexandra's response, "rolling PSR" is computed by LEAN (I can't seem to figure out where the rolling part is though in github), while Jack's PSR is a single value derived from one stream of returns. Below shows you the difference for Sharpe Ratio (SR) and PSR for a few tickers if you buy-and-hold in the same timeframe between notebook (using annualized SR) and Lean. I would expect PSR for SPY to be a bit closer to 50% from LEAN. Avid notebook users... beware!
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Kamer Ali YUKSEL
I would be more than glad if someone can also share how to calculate rolling PSR.
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Kamer Ali YUKSEL
I also have a question, why you haven't utilized Deflated Sharpe Ratio? That seems to be an extension over PSR.
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Jared Broad
DSR was not deterministic, and required analysis of many backtests. PSR was chosen because it could be self contained with a single analysis.
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Kamer Ali YUKSEL
Hello Jared, thanks for letting me know.!I have a small objection about PSR. Since that it uses a long-only SPY benchmark, it does not make perfect sense for long-short portfolios or a long-only ETF portfolio that includes some inverse ETF(s), such as the current universe. I sometimes obtain better results in many of the metrics but the PSR is lower. To sum up, it is not a very good metric in terms of taking the market-neutrality into account (except for a long-only portfolio that does not include any Inverse ETFs - which is not valid for the current competition universe).
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Jared Broad
We chose not to use SPY as the benchmark but a fixed Sharpe-ratio of 1.0 to make the measurement cross-asset / cross-strategy type; so the PSR readings in LEAN's case are the probability the real algorithm returns are greater than 1.0 Sharpe ratio.
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Kamer Ali YUKSEL
Just to let you know, I encountered another implementation of PSR in some other source codes that I have checked. The first one below is that other implementation and the second one below is the implementation in this thread. I did not yet compare the output of those but they seemed to be different to me. I would welcome an advise on this.
std = np.sqrt(1 - (sps.skew(ret)*sharpe) + sharpe**2 * (sps.kurtosis(ret)-1)/4)
return sps.norm.cdf(sharpe * np.sqrt(len(ret)-1) / std)
std = 1 - (sps.skew(ret) * sharpe) + ((sps.kurtosis(ret)-1)/4) * sharpe
return sps.norm.cdf(sharpe / np.sqrt( std / (len(ret) - 1)))
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Rahul Chowdhury
Hey Kamer,
The other implementation of PSR you provided is actually the correct implementation as defined by the paper The Sharpe Ratio Efficient Fronter by Bailey D. & Prado M. (2012). That equation is the one that is defined in LEAN and is the correct one. However, we made a small mistake in copying it over in the journal post, which we've since fixed. There was a missing factor of Sharpe in the kurtosis term. With the added Sharpe factor, the two equations are the same, just differently represented. Thanks for pointing it out!
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Kamer Ali YUKSEL
Hello Rahul, Yeah, I also verified that later but did not want to write it here to make a conclusion :) Thnx!
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Apollos Hill
So i am finally rereading this thread. Sorrry. I know its kind of old now and has been added ot the Alpha criteria. I'm looking for tips on how to increase my PSR past 50 .
" the Probabilistic Sharpe Ratio is an atemporal measure of strategy performance expressed in terms of probability of skill beyond a given benchmark..." If we are using 1.0 Sharpe as a benchmark and not SPY...if my strategy is doing 250% return over a 5 year backtest, how am i only at 25-50% PSR and 0.8 sharpe? IS it suggesting that I somehow am not maximizing the profit potential of my strategy? I don't want to post a backtest here but i am in forex, trading 4 out of the 8 major pairs. I can't trade all the pairs or else i'm over exposed. I'm trading on weekly bars and holding for months using million dollar positions. I'm also in positions as much as i can be without over trading. 250% over 5 years is about 50% annual returns. Is that not worthy of a 1.0 sharpe? I doubt the assets that Ted posted above (with LEan SR thanks) could achieve these returns.
Appreciate the help on increasing my PSR so i can lease this alpha stream.
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Jared Broad
Hi Apollos, it means the volatility of the strategy is too high. Perhaps you can invest smaller, or risk-adjusted positions somehow? Could you invest for shorter periods to help reduce the exposure to swings of the market?
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Apollos Hill
Hi Jared
I tried only investing 1% per trade. I'm in the process of seeing if i can go to daily bars instead of weekly. Right now i have a nice 45degree slope up. It doesn't seem volatile to me. My Annual Variance and my Beta are 0.00. Not sure if that helps you or not. my sharpe is 0.729 so i guess PSR at 25% is saying that i have a 25% chance that my sharpe will be over 1% . So i need to improve my money making, without increasing drawdown, correct? 10% DD on a 48% total return over 5 years. (nowthat i changed to 1% positions)
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Rahul Chowdhury
Hey Apollos,
There is currently an issue with beta calculation for daily resolution data which produces 0 beta for all strategies. The true beta of your strategy may actually be larger. If your strategy is trading the same symbols for the same duration, changing position sizes will not dramatically change your PSR because your returns and drawdowns will scale proportionally. Instead try shortening your insight period or changing how you emit insights.
> my sharpe is 0.729 so i guess PSR at 25% is saying that i have a 25% chance that my sharpe will be over 1%
It means there's a 25% change your live-Sharpe is greater than 1.0; (in part because the backtesting Sharpe is 0.7)
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Ritaelyn
Hi Jared,
What's your thoughts of allowing for a sortino ratio as another means for submission? One thing I'd like to submit to alpha is about 3.60 sortino but it's under 1.0 sharpe, as sharpe unfortunately penalizes both upside and downside volatility equally.
Thanks for considering it!
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Hector Barrio
Hello Ritaelyn, I agree with you. Any equity trading during the COVID instability will be highly penalized by SR/PSR metrics, even if properly hedged and/or profitable. The normality assumption of the sharpe ratio can, in extreme cases, make very large positive returns in possitively skewed strategies undesirable. It is also a possibilty to have strategies that could "fish" for higher PSR by extending the test period to low volatility-low return periods (cool periods) even at equity loss.
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.ekz. INVESTOR
+1 to Ritaelyn point. I'd love to see Sortino Ratio. From what I've been reading, sharpe ratio (and subsequently PSR as well) is not the best perf indicator for trend following strategies.
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Petter Hansson
Here's the algo I'm broadcasting adapted from QT (link/attribution in code). I noticed it's trying to issue some too large orders at some points I don't really care to spend time figuring out why, and the code could use a cleanup. Also, if someone wanted to use this, carefully investigating slippage (particularly ensuring TLT and XIV have different values) is a necessity and possibly optimizing the order execution.
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Petter Hansson
(Also, a disclaimer, with XIV it's good to familiarize with the the fact you could lose 100% of your investment overnight in some extreme circumstance... you're making money taking on tail risk.)
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Thomas Chang
@Petter,
>>you could lose 100% of your investment overnight in some extreme circumstance...
Yes. But I think maybe this is a little bit exaggerated? :-)
As Alex said: But you can easily re-construct (using pandas or even Excel) VXX and XIV back to 1990 by using their underlying indices...
If it's really could be re-constructed, one knows how to do the risk-management in his algo, right? And I think this is at least much 'saver' than doing PUT or SHORT.
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Petter Hansson
Sure, just pointing out so nobody puts 100% of their capital into something like this. :-)
As for assuming the future will be same as the past, I don't recommend it in this case. Shorting volatility is a lot more popular now than in the past, which may lead to bigger kickbacks.
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Petter Hansson
Good reading from time on time regarding the subject of risks in volatility, if somewhat gloomy.
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Stevehank
Has anyone adapted any of the QT algorithms in below and successfully backtested in QC?
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Petter Hansson
I messed around with a ML version of something similar on QT but concluded the 'amazing' results in backtests were classical overfitting or out of date market inefficiencies. My ML version wanted to be long XIV mostly (go figure). These guys seem to arrive at something similar with better analysis than mine. That's not to say there isn't some signal in that data, but a few decision tree like rules or some linear classifier/regressor isn't going to cut it.
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Stevehank
Much of the gains from strategies in the previous link are via UVXY, has anyone implemented a volatility strategy in QC with UVXY?
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Thomas Chang
With UVXY? You will short it or long it?
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Petter Hansson
Caveat: Shorting UVXY is easy in the same way that being long XIV is "easy" - algos that do either on average will likely work for some time for that reason.
Also, the backtest will not take into account short interest paid and by default IB's leverage limitation (IIRC now effectively cancelling out leverage you get versus XIV) isn't represented.
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Stephen Oehler
Be careful about shorting something this volatile. I mentioned this in another post, but: you can not only lose your shirt but also your house by shorting something that has the potential to climb instantly for no reason. XIV has some protections in place to prevent it from climbing too rapidly (if one decides to thumb through the prospectus) but who knows the circumstances in which that would happen.
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TurboDZyl
I would like to implement a similar strategy as Alex did above, but selling call spreads or buying put options on UVXY, to limit risk. However if I simply add
option = self.AddOption("UVXY")in Initialize to be able to trade options, I get the following error once the backtest hits March 20, 2012:
Runtime Error: Microsoft.CSharp.RuntimeBinder.RuntimeBinderException: The best overloaded method match for `System.Collections.Generic.KeyValuePair<QuantConnect.Symbol,QuantConnect.Data.BaseData>.KeyValuePair(QuantConnect.Symbol, QuantConnect.Data.BaseData)' has some invalid arguments
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Jared Broad
turboDZyl -- Please avoid necro-posting or thread hijacking. If you have an issue with your specific algorithm post a new discussion and attach the backtest. To reference the original thread post a link to it in your new discussion.
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Anthony FJ Garner
Given Quantopian's abandonment of personal automated trading I'm not surprised the refugees come over here. Especially since Python is now possible. What I would really need to trade VIX algorithmically is an automatically generated front month concatenated futures contract also showing spot VIX so as to be able to compute my favoured measure of contango/backwardation.
Although presumably one could just keep taking in the individual front month contract.
The big worry on XIV of course is a termination event. While VXX may seem unlikley to terminate (although I have not checked the prospectus) it is designed to go bust anyway and will just have another price consolidation (reverse split). I guess the bigger worry however is that the managers may not be unable to purchase futures contracts (to rebalance) during a spike in vol since the vast short brigade will be competing to gain cover and reverse their shorts.
Nonetheless a safer route to long XIV may just be deep ITM VXX puts.
I much look forward to working on Quantconnect now it has integrated Python.
I must say that my VIX adventure so far is a simple monthly rebalance between an inverse VIX fund such as XIV and a geared bond fund based on simple inverse volatility. Maximum drawdown on back testing is vastly reduced but of course the low correlation may not hold and XIV may suffer a liquidation event.
However, provided a liquidation event only occurs once in a blue moon, the method should enable one to survive. And you need to be ready with an alternative way to short VIX. Shorting VIX options seems hopeless. I can find little joy there although theoretically of course the options are based on futures. Nonetheless trading monthly VIX puts does not produce anywhere like the performance of a monthly short of the futures front month.
Perhaps I have made an error somewhere.
Anyway, I'm a Quantopian refugee although I have to say I had not been active there for about a year. I suggested they "offer bread today not jam tomorrow" and they seem to have heeded me as regards their competition. Nonetheless Quantopian is of little interest now that you can no longer trade using their framework. Especially since few have interest in the model they want to trade – a very low beta long short US equity approach.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
No, you can not go back to 1990 by using indices.
While the VIX index itself goes back as far as 1990, futures on the VIX only commenced in 2004 and options in 2006. Without futures there is no contango/backwardation and no XIV or VXX.
The S&P Index on which XIV is basd only goes back 10 years. What you need to do it to use the actual futures contracts to simulate XIV and VXX and you need to interpolate the front ans second month as per the index. The first chart below is the drawdown chart obtained by maintaining a 1x short position in the VIX front month futures contract since 2004. No interpolation applied. The second chart is the drawdown of the S&P 500 VIX Short Term Futures Inverse Daily Index TR since 2007. As you can see the drawdown for XIV in the last crash would have been close to 90%. Not pretty!
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Artemiusgreat
My implementation for C#.
The main problem that I see with Pairs Trading is that it's not clear when spread between correlated assets is enough to open positions. Prices of assets are often different and to compare them we need to normalize them, but usually after normalization we cannot compare actual prices because they are measured in abstract units, e.g. logarithms. Will it be enough to compensate commision if divergence is equal to 0.35 or 0.25? In my strategy I tried to use difference between fast and slow MAs, but it's also an approximation, and thus strategy has losses, because when MAs converge it doesn't mean that actual prices converged too.
Idea with RSI proposed by author also looks like an aproximation and also gives loses, maybe someone has a better idea for indicator that can display divergence between correlated assets?
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Alex Muci
@Anthony FJ Garner: you're right, I was imprecise - thanks for clarifying here.
Unfortunately, I've just learnt that European retail investors cannot puchase more XIV shares from 1st Jan 2018.
Long explanation: under the coming MIFID 2, the XIV is classified as a PRIIP ("Packaged Retails Investment and Insurance Product") and its issuer must publish a Key Information Document (KID) before private investors can make further purchases (we are, of course, allowed to keep or sell the shares we already own). The issuer of the XIV (Credit Suisse) apparently does not intend to publish a KID and this is the real issue.
I guess this is a good execuse (new regulations) for CS to constraint or limit some recent buying pressure on the ETN.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
Alex
How about SVXY? I usually register myself as a professional investor - I had better check I did so with IB. I wonder how that affects dealing in the derivatives. Not that there are any in XIVs case but of couse you could always buy VXX puts.
Regulators in general are not the brightes or most constructive of people.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Alex Muci
Anthony.
I don't know about SVXY. I've only received a communication from my pension provider regarding XIV (since in my portfolio), but nothing yet from IB. Perhaps you are right and regulations does not apply to me as professional. Worst case my solution is shorting VX futures - less granular and more risky (since being long XIV had at least the the beaty to have a bound loss, not a luxury you have with short futures).
Definetely something worth checking with IB.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Anthony FJ Garner
Totally agree re shorting the futures - madness. If XIV becomes impossible (and also SVXY) I shall buy VXX puts. If those get banned well....um...its pointless using VIX options. Despite the fact they are linked to the relevant futures contract extracting the contango seems impossible from my back testing. I must triple check my back tester but....The returns using VIX options suck compared to using futures or the futures related ETFs.
Despite my scepticism I have also begun disaster insurance for my short VIX products using LEAPS going out two years, deep OTM. At least its some protection against a complete bust. Its a good strategy but it will be interesting to live throgh the coming shitstorm and survive....
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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