Or is it just me? Granted, my trading is based on the most "archaic" ratio model which has the heaviest reliance on the cointegration of traded pairs. But I've noticed a very prominent trend within my selected pairs (100+ at this point) that, for the past month, of more that half (closer to 75% by my rough estimation) of the trades I made, the pairs drifted further apart after I entered, either the shorted one ascended higher or the longed one descended lower or worse both, in other words the profitability of my strategy turned abysmal. I wouldn't have complained or felt frustrated if it was consistently bad or mediocre, but this under-performance seemingly came out of nowhere. I have been mostly trading the same pairs and using the same entry and exit metrics, and I was able to replicate an almost straight equity cure that goes upright, just like backtests I ran showed, for the first 3 months of so of the year. I reached 5.5+% and a 6+ Sharpe ratio with 0 leverage, and then bam, the whole portfolio started bleeding daily, every week I would have 1 green day and 4 red days it seemed like. Right now my equity curve looks like "亾" and it's not improving, as I'm typing this my portfolio is down 0.6% and this is the fourth red day of the week (today is Thursday).
This got me thinking, could there possibly be a fundamental change in the market dynamics recently? If you think about it, every trade has an opposite trade and the opposite side of stat arb is trend following strategy, in which stocks showed recent strength attract more buyers and the ones showed weakness attract more short interests. If pair trading started to fade that means trend following is gaining traction. I should also mention that I mostly select pairs from the same industry and I look back more than 5 years to make sure they have longer history of cointegration. So when the mean reversion of lot of these pairs started to lose elasticity, that tells us something about this market doesn't it? To me when market participants are more willing to ride on short-term trends that shows that they become more risk-adverse to some degrees, I don't know if this is a valid reason but intuitively it makes sense to me.
I have only started trading this strategy this year I might not know what I'm talking about lol. Anybody with more experience pair trading wants to chime in on this? How is your strategy holding up this year especially the recent month? Is sudden under-performance like this common? Any inputs will be greatly appreciated.
Ray
