FX Quant 11 - Backtesting Results

Below are given back testing results of FX Quant 11 (ver. 12/2012), generated by our software. These results should be considered as extrapolation into the past of FX Quant 11 - Currency Trading Program, which started live trading on January 2, 2013. It replaced the older versions of the strategy, which have been trading since November 1, 2008. Performance fees (20% of new net profit above high water mark) are not deducted from back testing results. To see actual trading results, please go to the FXQ / Real Performance page.

- The variability of returns is low and the Sharpe, Sortino, Calmar and Omega Ratios are excellent - among the highest in the currency trading industry. The strategy is extremely robust i.e. insensitive to parameter changes (it is not a curve fitted, or over optimized system), which usually promises excellent performance in forward trading, after the back testing period.

- Transaction costs are very low (2.45% of net asset value per annum), relative to average annualized rate of return (27.9% per annum). Since bid/ask spread costs are around 10% of theoretical return, actual rates of return are 90% of theoretical returns.

- There is no upper limit on the account size. By trading more frequently (for example, 1/3 of account traded each 8 hours) the strategy can trade accounts of virtually any size without performance degradation (it would be even improved, due to time-factor diversification)

- The strategy is not affected by price slippage (it trades in small increments, by market orders, only once a day). Hence, the actual trading results are very close to hypothetical results. See "Transaction costs" above.

- The strategy has never been negative on annual basis (see the 12 Month Rolling Return graph below).

FX QUANT 11 - Ver.12/2012 - HYPOTHETICAL PERFORMANCE REPORT FROM STRATEGY BACK TESTING

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

VAMI

1999

1.21%

(0.32%)

2.05%

(1.77%)

2.23%

0.45%

(1.06%)

2.57%

0.82%

0.38%

0.73%

1.34%

8.88%

1,088.8

2000

2.19%

1.75%

1.99%

0.11%

1.20%

2.40%

1.10%

2.01%

2.20%

2.07%

2.80%

0.74%

22.57%

1,334.6

2001

2.84%

3.13%

1.29%

1.87%

(0.25%)

2.33%

1.53%

1.20%

(0.56%)

2.79%

0.81%

1.83%

20.41%

1,607.0

2002

1.12%

1.13%

0.30%

1.21%

0.60%

(0.46%)

0.97%

2.95%

1.35%

1.23%

1.15%

(0.78%)

11.25%

1,787.7

2003

2.23%

(0.24%)

2.73%

1.25%

3.24%

(0.41%)

4.35%

1.24%

1.87%

0.93%

1.69%

0.00%

20.47%

2,153.6

2004

2.13%

3.03%

5.20%

3.63%

4.63%

5.85%

3.16%

1.75%

1.68%

0.93%

2.18%

4.16%

45.65%

3,136.7

2005

2.86%

2.06%

3.00%

1.80%

1.37%

(0.08%)

4.95%

0.11%

0.72%

3.47%

0.67%

1.30%

24.48%

3,904.7

2006

1.48%

1.38%

(3.76%)

2.62%

3.67%

5.33%

0.74%

(0.26%)

1.20%

0.25%

(1.11%)

(0.41%)

11.37%

4,348.9

2007

0.68%

1.18%

0.97%

(0.63%)

(0.96%)

(0.48%)

0.65%

(0.73%)

(1.05%)

1.58%

1.81%

1.46%

4.51%

4,545.1

2008

1.51%

1.31%

0.86%

3.48%

1.64%

1.53%

1.16%

(0.17%)

0.83%

8.44%

7.06%

0.86%

32.06%

6,002.4

2009

3.57%

5.50%

(0.77%)

4.42%

(1.82%)

3.54%

0.50%

0.63%

(0.10%)

1.17%

2.05%

0.80%

21.02%

7,264.2

2010

0.15%

(0.91%)

0.89%

1.05%

1.60%

(0.56%)

1.85%

1.03%

(1.13%)

1.72%

(0.41%)

(0.02%)

5.35%

7,652.8

2011

1.71%

0.39%

0.18%

0.09%

0.49%

1.16%

0.09%

(0.16%)

3.08%

1.33%

1.43%

0.36%

10.59%

8,463.0

2012

(1.33%)

0.49%

0.34%

0.68%

(0.17%)

0.11%

(1.99%)

0.22%

0.96%

0.48%

0.90%

(0.38%)

0.28%

8,486.6

2013

Start of live trading. See the FXQ real performance page.

2. Performance Statistics Fx Quant 11 - V.12/2012 (Before Performance Fees)

Strategy Returns (Before Performance Fees)
Testing period	Jan/1999 - Dec/2012
Net profit on fixed capital with / without monthly profit reinvesting	748.7% / 217.5%
Sum of positive/ negative monthly rates of return - ROR (gross gain / gross loss)	242.7% / (25.2%)
Compound average annualized ROR	16.5%
VAMI - Growth of $1,000, compounded monthly (fees not deducted)	$8,486.6
Monthly Profit Factor (Profit to Loss Ratio); (sum of positive RORs) to (sum of negative RORs)	9.63
# Profitable months / average positive ROR	135 / 1.80%
# Losing months / average negative ROR	33 / (0.76%)
Kurtosis of monthly RORs	2.49
Skewness of monthly RORs	0.90
% Profitable months	80.36%
Ratio avg. positive / avg. negative monthly ROR (Gain to Loss Ratio)	2.36
Max. # of consecutive profitable / losing months	23 / 3
Maximum / minimum month-to-month ROR	8.44% / (3.76%)
Maximum / minimum daily ROR	9.05% / (5.95%)
Maximum / minimum 5-day rolling ROR	11.18% / (9.82%)

Risk Measures
Annualized standard deviation of monthly RORs	5.83%
Annualized d ownside deviation (MAR = RF return of 3% per annum)	1.7%
Sharpe Ratio, annualized (RF rate of return 3.0%)	2.66
Sortino Ratio, annualized (below RF ret. 3%)	9.02
Calmar Ratio (ratio compound average annual ROR to worst end-of-month drawdown)	4.30
Omega Ratios	Download
Tracking error, relative to the S&P 500 Index, annualized	18.13%
Historic 5-day Value at Risk (VaR); (for 95% and 99% confidence levels)	(0.94%) / (2.30%)
Alpha relative to the S&P 500 Index, annualized	16.93%
Beta / correlation coefficient, relative to the S&P 500 Index	(0.086) / (0.23)
Jensen's Alpha relative to the S&P 500 Index, annualized	15.51%
Active premium, relative to the S&P 500 Index, annualized	15.43%
Information Ratio, relative to the S&P 500 Index	0.73
Worst month-to-month drawdown depth / duration	(3.76%) / Mar-Apr. 2006
Worst peak-to-valley (intra month) drawdown ; (see graph below)	(11.21%) / Aug 10, 2011
Longest recovery period; see also the Drawdown Histogram chart below	7 months /Apr-Oct 2007

Basic Strategy Characteristics
Strategy name	FX Quant 11 (V.11/2012)
Type of trading	Forex statistical arbitrage
Portfolio composition	100% currencies (9 currencies)
Margin to equity ratio	Average 1.5%, max. 4%
Strategy leverage (long positions value relative to Net Asset Value - NAV)	Average 0.65, max. 2.00
How generated	Back testing - hypothetical
Start of live trading	January 1, 2012

Turnover / Cost Parameters
Average total (long + short) positions value, relative to NAV*	88%
Average daily portfolio turnover (daily traded positions value as a percentage of NAV)	20.5%
Annual turnover ratio	62.0
Average holding period	4.19 days
Average number of R/T transactions (100k FX lots) per $1Million NAV per year	980
Average annual transaction costs - bid/ask spreads (deduct from annual ROR)	2.45% of NAV per annum
Average transaction bid/ask spread, as a fraction of the transaction value	0.00025

* - Total long/short position value is roughly 2 × strategy leverage. It is used for portfolio turnover and costs calculations. Leverage (long only position value) is used as a measure of exposure.

To see more backtesting results, download this Excel table (Fx Quant 11 - V.11/2012). Explore all Excel worksheets (click the tabs at the bottom) and scroll down all worksheets to see graphs and performance analytics. You can also download daily rates of return from backtesting (Excel, 1 MB), with 5 day VaR calculations and 5-day ROR histograms.

PLEASE ANALYZE AND THOROUGHLY UNDERSTAND THE RISK / DRAWDOWN PARAMETERS ABOVE AND THE DRAWDOWN CHART BELOW BEFORE YOU DECIDE TO INVEST IN THE PROGRAM. AS WITH ANY TRADING PROGRAM, THERE IS NO GUARANTEE THE SYSTEM WILL NOT EXCEED THE WORST DRAWDOWN FROM THE PAST. WE DO NOT RECOMMEND INVESTING MORE THAN 1/3 OF YOUR TOTAL INVESTMENT PORTFOLIO IN ANY PARTICULAR PROGRAM, INCLUDING QT - CURRENCY TRADING PROGRAM.

3. Performance Graphs and Histograms

3.1 Monthly Graphs

Note the semi-logarithmic co-ordinates in the VAMI chart

3.2. Daily Graphs

The above histogram shows that:

1. There is very regular, bell-shaped, thin tailed distribution of 5-day rolling rates of return . Robust systems, which are not curve-fitted usually have this type of distribution.

2. The 5-day rolling rate of return (ROR) mean is positive and equals 0.299%. There is a 50% probability that the 5-day rate of return will be greater than 0.299% and 50% probability the return will be less than 0.299%.

3. 5-Day RORs are more clustered in the positive territory in the histogram above. There is a 31.4% probability that a 5-day ROR will be negative and a 68.6% probability the 5-day ROR will be positive.

4. The 5-day Value-at-Risk (VaR) for the 95% confidence level is 0.94%. This means that the risk of loss in a 5-day period is 0.94%, with a 95% probability. The probability of loss of more than 0.94% in a 5 day period is 5%. Similarly, the 5-day VaR for the 99% confidence level is 2.30%. Excessive negative RORs do and will happen, although with decreasing probability. To see these calculations open the 5 Day ROR Percentile tab in this Excel workbook.

Drawdown Analysis

The Drawdown Histogram above shows:

1.) how many days the system was in drawdown of given magnitude (the red colored line). The back testing period is 3638 days;

2.) what time (as a percentage of the total back testing time) the system spent below a given drawdown level (the blue colored line). For example, the system spent only 5% of time (182 out of 3638 days) in drawdown worse than 2.43%, and only 1% (36 out of 3638 days) in drawdown worse than 4.11%. These figures also give some idea on the recovery time. Calculations can be found in this Excel worksheet (1.1 MB), under the Drawdown Histogram tab.

The most important facts to remember from the Drawdown Histogram are that:

1.) large drawdowns are relatively rare (the larger the drawdown - the less the probability, although it does exist - see the 11.21% drawdown far left in the histogram above);

2.) the system quickly recovers from extremely large drawdowns. There is no answer, however, how deep the drawdown can go; statistics only show it should not last for too long. This chart also shows how important it is to be patient and not to quit trading during drawdown (which is the worst possible moment to do so).

You might also want to see these equity and position size graphs.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PLATFORMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION AND INVESTMENT OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. TRADING IN FOREIGN EXCHANGE IS SPECULATIVE AND MAY INVOLVE THE LOSS OF PRINCIPAL; THEREFORE, FUNDS PLACED UNDER MANAGEMENT SHOULD BE RISK CAPITAL FUNDS THAT IF LOST WILL NOT SIGNIFICANTLY AFFECT ONE'S PERSONAL WELL BEING. THIS IS NOT A SOLICITATION TO INVEST AND YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTION. PLEASE SEE THE COMPLETE RISK DISCLOSURE.