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Feb 13

Interview: Ernest P. Chan Quantitative Trading

Posted by abiao at 11:03 | Interview | Comments(0) | Reads(10790)
Dr. Ernest P. Chan is an expert in the development and application of statistical models and software for trading currencies, futures, and stocks. He is the principal of QTS Capital Management, LLC., which manages a hedge fund as well as individual clients’ accounts. He also offers training to clients via workshops or individualized consulting to trade for themselves using Matlab. Dr. Ernest P. Chan is the author of the famous book "Quantitative Trading: How to Build Your Own Algorithmic Trading Business".

Ernest Chan quantitative trading

Tell us a little background info about yourself. Where are you from? What’s your education background?


I was born in Hong Kong, and I moved with my family to Toronto, Canada, when I was 17. I studied physics as an undergrad at U of Toronto, and received a Ph.D. in theoretical condensed matter physics from Cornell University. But after graduation, I never did any work in physics. I first worked as a researcher at IBM T. J. Watson Research Center’s Human Language Technologies group, where I designed statistical pattern recognition algorithms. Quite a few of my colleagues in that group moved on to become hugely successful algorithmic traders. (The current heads of Renaissance Technologies, Robert Mercer and Peter Brown, were both managers of that group.) After a few years, I too moved on to a career in finance, beginning at Morgan Stanley.

How long have you been as a quantitative trader? We know you had worked for a few big investment banks and hedge funds, what are the pros and cons of working as an independent traders and a manager of your own fund, instead of in a big firm?


I started researching algorithmic trading strategies in 1997, began trading my own strategies for a hedge fund in 2003, becoming an independent trader in 2006, and started my own hedge fund in 2008. The obvious benefit of working for large institutions is that you will receive a very decent salary, whether or not your strategies ultimately work. And if they work, the compensation can be large, if not astronomical. The drawback is that you have to deal with the politics, and more problematically, the traded strategy is often a product of compromise or consensus among various parties, which is rarely optimal. So it is actually rather hard to find a strategy in this environment that will make money for your institution. Working as an independent trader, or starting your own fund, is very demanding on your intellectual as well as emotional energy. But actually, it is easier to find profitable strategies that work for a small amount of capital, though the profits will also likely be much smaller due to limited capital, and there is no guaranteed salary to fall back on if they fail. Of course, success in this case can be more satisfying than just receiving a big bonus from your boss. On the whole, from a purely financial point of view, working in a large institution probably generates a higher expected lifetime income for you. But if you take into account the psychological rewards of being your own boss, and if you truly have the skills necessary to trade successfully, then the expected satisfaction, or “utility” in economists’ parlance, of being an independent trader or fund manager is higher.

What are the main types of assets you are trading? Equity, futures, or other derivatives? I read from your blog you started with equity, and then traded futures, so what characteristics do you feel is the most different for these types of assets in terms of trading strategies generation?


I used to trade only equities, though now I trade mainly foreign currencies. I dabbled in various futures strategies from time to time, but those have not formed a big part of my portfolio. Equity strategies are becoming less profitable because of the lower volatility in the market (notwithstanding August 2011), higher correlation among stocks, and the rise of high frequency trading. The first two factors do not present problems to FX strategies in general, and there are not as many high frequency traders in FX yet, so profitability can be high, especially since leverage can be higher as well.

What do you think it takes to be successful as a Quant trader? What is the best advice you’ve been given and you like to share with Quant traders?


The most important characteristic of a successful trader is to realize that the signal to noise ratio is very low in financial markets, so keeping one’s models simple is essential. The best advice I have been given is that high leverage kills.

2011 was a tough year for many traders, especially for those trend-following traders, what is the outlook for 2012 algorithm trading?


I don’t pretend that I can predict volatilities! But so far, the environment has returned to the favorable condition prior to August, 2012.

What accomplishments so far are you the most proud of?


Not having a personal down year since 2007.

What is the single toughest challenge you’ve had to face in your past trading, and how did you get through it?


There were a few days when the intraday drawdown was over 10% of my net worth. Those were scary times, but luckily the end-of-day P&L weren’t as bad. The important lesson to learn is to have confidence in your models during crisis, and not to manually intervene.

What have you been up to recently? What projects are you working on?


A publisher has asked me to write another book, so I am organizing some ideas that I have learned in the past few years. Of course, research into new strategies is always on-going. Also, once every few months, I teach trading workshops in London and Singapore. But my first priority, of course, is to operate my fund and generate profits for my investors.

Can you describe a typical work day of an independent Quant trader? How do you like to spend your free time?


Typical workday begins at around 7am, which is when I start various programs for data downloading and  trading. Then research and discussions with colleagues over emails took up the best part of the day. I spend very little time marketing my fund – typically investors know me from my blog or meet me through my workshops. I take long walks in the middle of the day: I live in a fairly rural area, so this can be quite pleasant. And in the winter, singing in the choir has become a major pastime as well.

How can people contact you for business? Do you have a website or Twitter account or Facebook “Like” page?


Prospective clients can reach me through epchan.com, or through my blog epchan.blogspot.com.


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