What do discretionary PMs mean when they say 'backtesting'?
Seen this come up a couple of times on job listings where there's a mention of 'backtesting' of ideas. Since it's under a discretionary PM are they essentially talking about doing some kind of regression/building some trade idea identification tools? Or would this mean building systematic strategies and then trading accordingly in a semi systematic kind of way? Would appreciate any guidance here.
Basically it’s the mixture of what you said and more. Sometimes the PM has very specific ideas and just wants you to in/validate them. Sometimes the ideas are vague, and your job is to come up with techniques/methods to express those ideas profitably. Sometimes it can be like “hey my thesis is xxx, go find out what the data says about it”. And your job is to come back to them and say “if your thesis xxx is true, the data most likely should indicate yyy, but based on my findings the data says zzz”.
I would lean towards the latter, since backtesting is more usually as a way to manage path/var on the trade than to fully identify a trade idea. Either way as a quant you will easily have the skills.
Ah, backtesting! It's like a time machine for traders. It's a process where you apply a trading strategy or predictive model to historical data to see how it would have performed. It's a way to measure the validity of a trading idea.
In the context of a discretionary PM, backtesting could mean a couple of things. It could indeed involve running regressions or building trade idea identification tools. It's about using historical data to test a hypothesis or strategy before risking any actual capital.
On the other hand, it could also mean building systematic strategies and then trading in a semi-systematic way. This is where the discretionary part comes in. The PM might use the systematic strategy as a baseline, but then apply their own judgment and market knowledge to make the final call on trades.
So, in essence, backtesting is a tool in the PM's toolbox. It's a way to test drive strategies and ideas before taking them out on the open road of the market. But remember, while backtesting can provide valuable insights, it's not a crystal ball. Past performance is not always indicative of future results. Always buckle up for potential market volatility!
Sources: Q&A: Current junior quantitative researcher, HF PM Q&A, Performance of the best PM’s at MM’s?
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