As of this afternoon, a total of 1149 of approximately 2,500 hedge funds have reported data for October, 2009; so it's now time to update our data and forecasts for the dynamic trading risk factor. This gives us an early estimate of a number that is not much likely to change during the rest of the month.

Out-of-sample, our final forecast of the return for September, 2009, was 1.10% (our early forecast was 1.11%), and the realization was a substantial 3.25%. Our final forecast for October, 2009, was 1.61%, yet our current estimate of the performance for the most recent month is a loss of −0.20%. As a result we are forcasting a 0.30% return for November, 2009. These forecasts represent an a priori expected monthly return for any fund or firm that makes it's living by trading.

The Compact Model Portolio, which has been quiescent for a long time, has traded again. This time substituting FAS, which is the triple leveraged financials ETF for SDS, which is the double short S&P 500 tracking ETF. (The history of the composition of this index, and it's daily return relative to the benchmark, have are available on the blog side panel.) This trade actually occured on 20/10/2009, but I've been very busy on other projects and have been unable to update the blog for a while.

Astute observers of the Compact Model Portolio, which had been quiescent for a long time, will have noted that it has once more traded again. This time substituting EEM, which is the ETF following the MSCI Emerging Markets Index, for J.P. Morgan. (The history of the composition of this index, and it's daily return relative to the benchmark, have are available on the blog side panel.)

Professional managers are fully awhere of the transient and random nature of the returns they create, whether actively or passively, and are real human beings with the behavioural biases and oddities that characterize us as a group. Thus, when we are presented with a month in which we do very well, we are aware that the future will likely hold periods of underperformance. Furthermore, it is likely that the month following a good month, the month during which we are preparing a formal summary of the prior returns that we know were good, we are more likely to underperform that recent history than outperform it. Nobody wants to write the letter:

Dear Investor, last month we did very well. However, as I write this I know that we're doing less well, so don't get too carried away with your newfound wealth that I've already lost.

Furthermore, a manager who is confessing to a particularly dire prior period of returns would greatly like to write:

Dear Investor, last month we did badly. However, as I write this I know that we're doing very well, so please do not distress too much over your losses, which have already been erased.

For an example of this latter tendency, I can simply refer to my prior post on the September, 2009, performance of our NASDAQ-100 futures trading system. Both these forces together, provide the incentive for outperforming managers to report their returns promply and for underperforming managers to linger a while before sending the letters out of the door. Thus, we can explain the tendency observed in our analysis of the incremental updates of the BarclayHedge data.

We have been trading NASDAQ-100 futures under a our One-Shot strategy, and publishing that trade data to Twitter since April, this year. The following chart shows the performance of this trading, to date. Put simply, the 1st. of September was very bad. We got into the wrong position and rode it down. Some money was made back by trading during the month, but the month as a whole was a poor one for this strategy. Fortunately, today (the 1st. of October) was very good. Good enough to cancel out its antecent date, but in the wrong month to make the performance numbers look nicer.