3 Pre-Backtesting Mistakes Beginners Often Commit

To ascertain the robustness of an investment strategy in the financial markets, professionals often default to backtesting. Backtesting is a process where professionals test the buying and selling rationale of their investment strategy using historical prices, and finally proceed to measure the risk and reward they could have earned across the historical backtest period. The performance results of the backtest are then deemed to be somewhat indicative of how the strategy will perform in the future.

However, prior to backtesting, there are usually a few caveats to take care of in the dataset. Beginners often commit these mistakes which could easily go unnoticed. This is dangerous because no matter how great an investment strategy is – garbage results will be obtained from garbage input. In this article, we look at 3 pre-backtesting errors which beginners usually commit.

1) Unaligned dates

It is very common to backtest with different financial assets. For instance, an investment strategy could involve both the SPDR S&P500 Index ETF (SPY) and the DAX Futures (FDAX). Beginners often download historical prices for the same start and end date, and then proceed to backtest.

However, it is important to note that different financial assets may be listed in different countries. From the example above, this means that while the SPY may not be trading on 4th July as it is a holiday in the US, the FDAX is still be trading. This results in a price for the FDAX on 4th July but no prices for the SPY for the same date.

2) Missing Data

Sometimes, data obtained could have missing data points, even if the data came from Bloomberg – who are one of the top data providers in the world. The data could be missing because there was a mistake in recording of prices at the exchange. Either way, this will create holes in the dataset which we use for backtesting.

Many professionals use a forward filling methodology to overcome this problem, where they assume that the missing data is equivalent to the previous trading day’s prices. For example, suppose the stock price of Apple is missing on 10th July 2013. We would then assume that the stock price of Apple on 10th July is the same as that of 9th July 2013.

However, one caveat of this solution is when a couple of days of data are missing. In such cases, we would have the same data point for several periods.

3) Disjoint Prices

Due to different kinds of corporate actions such as dividends and stock splits, stock prices often go through a series of big jumps or dips. One example would be the recent dividend pay-out from Apple. Apple announced a cash dividend of USD0.63, and its stock price dropped by USD0.63 on the ex-dividend date on 11th May 2017. If we were to use stock prices that showed this drop of USD0.63, our investment strategy might misinterpret it as market forces causing the price to drop and wrongly recommend an action to take i.e. buy or sell or hold.

Another example is in the case of stock splits for Apple. Over its trading history, Apple has undergone a total of 4 stock splits, with its most recent one in June 2014. Stock prices change severely when undergoing stock splits – Apple’s price was divided by 7 in its last stock split due to a 7 for 1 stock split.

As such, it is important for us to use continuous price series rather than disjoint prices. Yahoo Finance, for one, tends to provide stock prices that are already adjusted for both dividends and splits.


Backtesting is an important process frequently used for testing an investment strategy. In fact, all kristals at Kristal.ai are required to undergo some form of backtesting to ensure that they are suitable for investment. However, the steps to collect and clean the data prior to backtesting are equally necessary yet often neglected by many analysts out there. To better understand how we perform the entire backtest process at Kristal.ai, please feel free to comment on our blog or reach out to me at junda.qiu@investo2o.com.


The Different Ways to Invest In an Index

Today’s financial markets provide a huge variety of different securities. Each security is unique, which allows different investors to participate in the market. For example, investors looking to invest in the S&P500 index can already choose from

  • SPDR S&P500 ETF
  • S&P500 Index Futures
  • Mini S&P500 Index Futures
  • S&P500 Index Options
  • SPDR S&P500 ETF Options

While all these securities are similar in the sense that they mimic the movements of the S&P500 Index, the characteristics of each security differ, making them suitable for different investors. In this article, we discuss the intricacies of each of these instruments with the S&P500 Index as an example, and thereby list certain reasons why professionals might prefer one over other.


The SPDR S&P500 ETF is widely known by many as the “Spider”, which originated from its ticker symbol on most broker platforms as SPY. This instrument is called an exchange traded fund (ETF), which is a portfolio invested in multiple companies that make up majority of the S&P500 Index. More information on the holdings of this portfolio can be found here.

Today, the ETF is sitting around USD238. This makes the ETF instrument a relatively cheap product to purchase. In addition, due to the similarity of the ETF to a stock, retail investors without any experience in investing are also able to access this instrument. Frequent uses of this ETF include benchmarking to investment strategies.

S&P500 Index Futures and E-Mini S&P500 Index Futures

The S&P500 Index Futures instruments are unique compared to the rest because no upfront cost is required to buy the instrument. Instead, investors enter into a “contract” and earn profit or loss on a daily basis based on their entered contract price. This concept is known as mark-to-market.

While these instruments sound attractive since an investor pay no upfront cost, one caveat for these instruments is their multiplier. This multiplier refers to the dollar change for the smallest possible change in the contract price. For instance, the multiplier for the S&P500 Index Futures is $25, and the smallest possible change in contract price is 0.1. This means for every 0.1 change in the contract price for the S&P500 Index Futures, the contract will increase or decrease by $25.

Investors who find the increment in the S&P500 Index Futures too large can opt for the E-Mini S&P500 Index Futures. This instrument is almost an exact replica of the S&P500 Index Futures – the only difference is the smallest possible change in contract price is 0.25, with the multiplier worth $12.50.

It is important to note that apart from the SPDR S&P500 ETF, professional investors also tend to flock to these futures instruments, particularly the E-Minis for its smaller size. This is because these 2 futures instruments tend to offer excellent liquidity, resulting in a relatively small bid-ask spread. More information on advantages of futures over ETFs can be found here.

As compared to the ETF, the futures product is a much more sophisticated product as it is involved with other more complicated concepts such as initial margin, maintenance margin and margin call. Thus, retail investors green to trading are typically not able to access this product until they gain some experience and have minimum amount of capital.

S&P500 Index Options

Apart from ETFs and futures, one important way investors can use to gain exposure is the option market. Options are financial instruments which dictate profit or loss based upon a certain strike price. For example in the case of a put option – if the strike price of the put option is USD2400, and the S&P500 Index is trading at USD2350 on the maturity date, then we say the put option is worth USD50 at maturity.

Just like the SPDR S&P500 ETF, the price of the option must be paid upfront, although the price is much lower than the S&P500 Index. However, financial regulators tend to also group options under the same umbrella as futures – this means retail investors are unlikely to be able to access these instruments until they achieve a minimum net worth and gain some experience in investing. For that reason, only professional investors typically use the S&P500 Index Options, because not only is it a cheaper way to gain exposure to the S&P500 Index, but the great variability in strikes and maturities allows professionals to customise their views on the S&P500 Index.


We have seen that ETFs, futures and options with the S&P500 Index as the underlying asset are some very popular ways for an investor to gain exposure to the S&P500 Index. Of course, it should be noted that this list is not exhaustive – there are even option markets on the S&P500 Index Futures, or even inverse ETFs such as the ProShares Short S&P500 which are more exotic financial instruments for gaining exposure to the index. The takeaway is that new investors or traders need not be confused by the numerous number of instruments available for any underlying index, as most of them have instruments similar to the examples given in this article.

GVM Global: Globally the markets still have upward momentum and encourages us to buy on dips generated by political fears.

The US market hit some turbulence as the earning season hit the retail sector. The impact of Easter, rising wages, online pressures, strong usd and weak tourism, closing stores, falling footfalls in malls, took their toll on department stores and suppliers. Interestingly this didn’t seem to put much of a dent in the consumer discretionary etf. Housing was ok and auto sales were bad in the first quarter. The tech sector has been the market leader with the FANG stocks capturing a huge slice of all market movement.

Oil price was the other major factor swinging markets along with commodity prices which tumbled in China. Oil below 45 hurts the market and below 40 is where we see the risk of defaults from that sector. This is a risk that seems for now to be contained as buying has stepped in when there are falls below 45.

China is slowing its credit growth as the government clamped down on shadow banking. There has been a drop off in the frantic pace of loan growth which will impact the market direction. Some caution is therefore required, though the earning season has been very strong and some sectors carry on doing well.

Overall, globally the markets are still with upward momentum. The Fed looks set to raise rates next month which could further pressure carry trades and deleveraging causing some market turbulence. The Trump agenda seems to have run aground completely which means tax cuts are delayed. This is now built in the market expectations. Brexit and French elections will decide the European landscape by June.

The equity portfolio companies have been firing solidly on the growth front. There is a good mix of value and momentum in the portfolio. As markets get jittery we see the ideal stocks being a subset of the two. Overall we remain fully invested at the moment as we are in a strong upward trend which encourages us to buy on dips mostly generated by political fears.

Carry++: Tech stocks continued to scale new highs with NVIDIA delivering spectacular performance. 

Screen Shot 2017-05-12 at 7.30.42 AMI had initiated longs on NVIDIA via Options at 105 in Technology ELON and added to it at when it fell to 96 in Carry++. NVDA trades above 128 today 11th May. I am long 110 Calls in Carry++ and 110/130 Call Spread in Technology ELON. As Amazon spreads its wings, its hurting the US retail sector. This has been evident in the price movements of of retail ETFs over last few weeks and Macy’s results earlier today. As I meet people on the ground in the US, it is becoming more evident on what kind of inroads Amazon has made into every household and how its likely going to hurt brick and mortar players till AMZN buys them out. I have initiated short calls on XRT and long risk reversals on QQQ in Carry++. I think there is more upside in new age tech relative to the other industries.

Tim Au: Hong Kong Market update

Screen Shot 2017-05-12 at 7.38.07 AMThe Hang Seng Index is largely positive this week reaching a year high of 25,125.55, up 14.1% YTD. The Chinese government is said to prop up the Hong Kong stock market for handover day on 1st July when Xi Jinping is expected to visit. This makes us wonder if the index is relevant to investors at all.

In another news, AAC Technologies (2018.HK), a highly praised company in the investment community, is under attack by Gotham City Research. The report claims the company used more than 20 hidden related parties to overstate its profits by bypassing Apple’s stringent labor standards. The stock is down more than 10% on Thursday.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Arun Pai: Why I Like Triyards? – A Company report

Triyards is an engineering and fabrication solutions provider focused on the offshore O&G industry. Its primary business is manufacturing of highly advanced and sophisticated liftboats (self-elevating unit or SEU’s) and offshore service vehicles (OSV’s) having built one of the world’s largest in both categories: BH450 and Lewek Constellation respectively. To further diversify the company (along with generating synergies in regards with close proximity of the yard docks to facilitate supply chain management), Triyards acquired Strategic Marine in late October 2014 for AUD 23.3 mm, thereby expanding their production capabilities into the high speed aluminium based offshore vessels such as patrol vehicles for law enforcement agencies etc.

Oil, on the back of a large mismatch in the global supply and demand equation, has taken a severe beating in recent past, crashing from over $100 in mid-November to under $30 in the beginning of the year before retracing to its current level of around $45 a barrel. There have been numerous headlines pertaining to the doom and gloom in this sector with the various E&P majors drastically cutting capital expenditure leading to a spillover effect on its numerous service providers and bankruptcies in the case of the over leveraged ones (Swiber, listed in the Singapore stock exchange, to name the most recent high profiled one). This was quite unexpected for the Singapore market, leading to a large correction not only in this space, but also the financial institutions who carry substantial amounts of loans to the affected industry on its books. While no doubt, the industry faces large headwinds, we believe Triyards to be on an extremely strong business and financial footing that manic Mr Market is currently providing a very attractive price to purchase.

We approach this by evaluating both business and valuation to go in detail as to why we think Triyards is an excellent business that has good future prospects yet trading at a substantial discount to what we believe to be its intrinsic value.

While highly volatile oil prices make it extremely difficult for companies to make large capital commitments, taking the bear case scenario of it remaining in this range, more attention will be paid to existing shallow water rigs (deep water extraction is more expensive), with SEU’s being the most cost effective way to service them. SEU’s are used extensively in the Gulf of Mexico region and is only starting to being implemented here (the ratio of SEUs to platforms in North America is 1:14 whereas in South-east Asia, the Middle East and West Africa, its substantially lower at 1:60). Long term prospects of the business look bright with an order book of USD 321 mm as of Q2 2017 (Mar 2017 end) providing substantial clarity in these uncertain markets with 21% non-related to the O&G space – something management actively starting working towards end 2014 given volatility in the oil space, while not to mention expanding into the crane manufacturing space which yields higher margins. They even managed to expand revenue be it ever so slightly this past quarter as compared to last year in very difficult market conditions. No discussion of a business can be complete without its competitor analysis, of which none are based in the South East Asian region. Halimar while being the largest player in this space having produced twice the number of liftboats as compared to Triyards is privately listed and based in the US. Gulf Marine Services (GMS) listed in the UK, is based in the middle east and mostly caters to in house production, rarely producing SEU’s for 3rd parties (while not to mention has a sizable debt issue currently). Conrad and Lamprell would be the other competitors, again based in the US and Dubai respectively. Triyards has proven in the last 5 years post its spin-off from Ezra, its ability to not just compete successfully in this region, but also been able to showcase its technological prowess by delivering BH450 and Lewek Constellation which are best in its class products.

We believe the safety of margin at the current price for this business is fairly large. If the market environment continues to worsen, no doubt the order book might begin to show cracks, but for a company that is profitable excluding the current one time loss provision taken due to Ezra’s bankruptcy, to be valued at 20% of book value we think is a bargain! Assuming 10% net margins (average of the last 4 years) of just the current order book already leads to a value of of 3/4th the market cap of the company. While there is no buffer of dividend currently as management deems it prudent to conserve cash in times like it is definitely in the best interests of the longer term shareholder for them to reinvest in the business as well as look for potential acquisition targets given distressed prices provided by Mr. Market .

Ezra, its parent company which recently filed for bankruptcy, holds around 60% of outstanding shares, which it is has given to 2 leading local banks in Singapore – DBS & OCBC as collateral. It seems highly unlikely that these banks will sell a large chunk of Triyard stocks at these deflated levels – in fact, while Swiber wanted to file for liquidation bankruptcy, DBS (with around SGD700 mm of exposure to it convinced it to in to jurisdiction management.

Full disclosure: The author has invested in Triyards in his personal account and NOT in his kristal for operational reasons.

Understanding different types of Investment Strategies

When I was first exposed to the investment industry, the wide array of financial jargon thrown about in daily conversations was overwhelming. Most times I would put on a straight face, pretending to understand what my superior was trying to say even though I didn’t understand. Behind their backs, I would scramble to research on the pieces of jargon which I could remember, so I wouldn’t look stupid and ignorant should the same topic come up again.

Kristal-blog-2-5This blog has been written to help readers understand the financial jargons and different aspects of investment strategies. Specifically, it will help users to differentiate between the different kristals on Kristal.ai.

Let’s begin with introducing the key features of any investment strategy – Direction, Degree of Automation and Basis of Analysis.


The directional bias for investment strategies refers to how a trader thinks the security price is going to change with regards to its current price. There are 2 different thought processes here – Mean reverting strategies and Momentum strategies. Mean reverting strategies look for a reversal of a security’s current movement. In other words, we are looking for the answer to – if the security’s price is going up, when is it going to go down? Or vice versa – if the security price is going down, when is it going to turn back up? On the other hand, momentum strategies look for the continuation of a security’s current movement. In other words, we are looking for the answer to – if the security’s price is going up, is it going to continue up? Or vice versa – if the security price is going down, is it going to continue going down?

Degree of Automation:

The degree of automation refers to how automated an investment strategy can be. The buying and selling rationale of an investment strategy is dictated by how a trader perceives the financial markets. He or she then decides on buying and selling rules for the investment strategy. The degree of automation refers to how strict these rules are – usually the stricter the rules, the more easily the strategy can be automated. Such strategies are known as Systematic strategies, where the word “systematic” refers to how the strategy follow a rigid format. On the other hand; and the more flexible the rules are, the less easily the strategy can be automated. Such strategies are also referred to as Discretionary strategies – where the buying and selling rules are up to the trader’s discretion and may change from time to time. The benefits of a systematic strategy is thus the ability to automate the strategy on a machine, which reduces the need for constant monitoring of portfolio since a machine can detect buy and sell signals. This benefit is absent in discretionary portfolios, since the trader must manually trade the securities on their own.

Basis of Analysis:

The earlier mentioned buying and selling rationale of an investment strategy is dependent on a trader’s analysis. And it is no surprise that different traders have different preferences and beliefs, resulting in different methods of analysis. This leads to different investors subscribing to only strategies whose analysis are in line with their beliefs. There are 3 general kinds of analysis – Fundamental, Technical, and Quantitative. Fundamental analysis is applicable to only companies, as its concept hinges on valuing a company through the strength of its balance sheets and cash flow statements. Technical analysis refers to the use of technical indicators such as moving average and Bollinger bands to gauge the price of a security relative to its fair price. Traders then buy or sell the security depending on the relativity. Quantitative analysis is the use of mathematical concepts to derive the fair price of a security. These concepts can range from simple to advanced.

Summary: Due to the different beliefs across investors, it is important to find an investment strategy that meets your requirements. At Kristal.ai, we make it a point that our roboadvisor can distinguish the different characteristics of each investment strategy, so that we can recommend an investment strategy which is not just appropriate in terms of risk profile, but also appropriate in terms of beliefs.

Read about new investment ideas from the Sohn Investment Conference

Sohn Investment Conference, which began in 1995, is one of the most renowned conferences in the field of investment management bringing together some of the biggest names in the space – Druckenmiller, Ackman, Einhorn, Gundlach to name a few. While there has been a heated debate in regards with the true value add of active money management with the advent of robo-advisors and index strategies, there was no dearth in providing advice by these fund managers. That being said, this is all for a good cause – to benefit the Sohn Foundation’s work to end childhood cancer. A summary of the conference minutes can be found here – http://www.wsj.com/livecoverage/ira-sohn-investment-conference-2017

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