Mon, 15/10/2012 - 11:29
Hendrik Klein (pictured) and his team at Zurich-based Da Vinci Invest AG have been trading futures on Eurex since 1995, using a sophisticated algorithm to track economic indicators. In 2009, when Need to Know News brought out a computer-readable news feed, Klein immediately implemented it into the Da Vinci algorithm. The proprietary strategy that resulted was highly successful, generating nearly 14 per cent between August and December of 2009.
The following year it made modest gains of 7 per cent but amidst the volatile, event-driven market climate of 2011 the news-based trading strategy came into its own, generating an impressive 58.6 per cent: a total return of 78.3 per cent since August 2009. On 1 June 2011, Da Vinci structured it as a fund: the Da Vinci K Squared Tachyon Fund. The fund was officially launched to external investors on 1 January 2012 and despite not being able to trade for the first five months because of technical issues, the strategy is already up 17.7 per cent through July; generating 16.6 per cent in July alone.
As its name implies, speed lies at the heart of the strategy; ‘tachyons’ are sub-atomic particles believed to be faster than the speed of light. That it uses an algorithm to scans news feeds for economic indicators to place trades makes the Tachyon fund a cross between a global macro and an event-driven fund. Either way, it’s the first fund of its kind.
“We use special news feeds that try to optimise their way from the source to the co-location: you need to co-locate your servers next to the exchange or data centre to minimise latency,” says Klein, who says that the fastest order executed, to date, was 0.6 milliseconds. “We currently have co-locations in Frankfurt and Chicago but might expand to Moscow, London. But this strategy isn’t just about speed and news feeds – the secret sauce is the algorithm itself. We’ve spent years of research developing its parameters.”
What the algorithm is essentially doing is predicting how specific instruments will behave when a piece of news comes out. Although not definitive, there’s a high probability the markets will move the way the algorithm predicts according to Klein.
The strategy currently trades six futures markets: three index futures – the Dax, EURO STOXX 50, and SMI (Swiss Market Index), and three interest rate futures – the Bund, Bobl (5-year German bond) and Schatz (2-year German bond). “We want to expand beyond futures to cover news and events in other asset classes,” confirms Klein.
“Certain events have certain impacts on specific instruments. We’ll look to therefore expand the range of instruments we trade with time.”
The Tachyon fund thrives off market surprises. If investment banks and economists get their estimations wrong, i.e. unemployment figures, that’s when the strategy excels. “The markets are less predictable than in the past. Experts are becoming less accurate in their estimates, which gives us opportunities,” says Klein. “If everything is in line, we don’t trade.”
All trades placed by the system are short-term – just a couple of minutes at the start and end of each day – after which the portfolio reverts back to cash. Incredibly, since August 2009 the largest drawdown has been just 0.8 per cent. This underscores the strength of the algorithm Da Vinci has created.
Looking forward, Klein says they will market the fund externally, but not too aggressively: “We want to scale it, broaden the number of events we look at, and build capital steadily. If we got to USD100million overnight the performance would decrease and there’d be less money to allocate. We’ll take our time.”
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