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StraBerry: Investment Letters

SQRT 20230605

This letter is exclusively for our StraBerry users. We kindly request that you do not circulate it.

Welcome 👋

On behalf of the entire SQRT team, we would like to express our sincere gratitude to you for being one of our earliest customers. Your trust and participation means the world to us.

SQRT, pronounced “Squareroot,” is a community of experienced quant traders and Web3 enthusiasts that have come together to tackle a major problem in the crypto space: While crypto offers useful new ways to invest, it is also a risky environment where many people have experienced financial losses.

High net-worth individuals have access to hedge funds that possess the expertise to construct and backtest portfolios of assets that reflect a specific proposition and are carefully risk-adjusted from time to time. However, ordinary people have been deprived of that privileged access.

Our solution? Build a user-friendly B2C platform, where anyone, regardless of their starting point, gets access to sophisticated quant trading strategies. We want to help our users participate in the growth of digital assets without having to become experts themselves. We want to democratize access to the wealth-building opportunities that Web3 enables.

As we prepare for the launch of our "official" product later this year, we are excited to work with you over the next 3 months to test and validate our assumptions and integrate the invaluable insights we gather from your experiences into our product development process. Since you are here with us right from the beginning of our journey, we have additional benefits planned specifically for you, which we will unveil towards the end of the Pre-Genesis Season.

As the Season progresses, you will hear from us regularly via our newly launched website (

LINK⁠

) and a series of bi-weekly investment letters like this one you are receiving today.

In the meantime, please don't hesitate to reach out to us at

general@sqrt.co⁠

if you have any questions, comments, or feedback.

We are excited that you are here.

With love,

Sorah & Juho, Co-founders of SQRT

Investment Letter

Hello, I'm Juho, the co-founder and CTO of SQRT. In my capacity as the Head of the Quant Team and Portfolio Manager, I will be guiding you through the StraBerry experience. To begin, I am delighted to present to you our inaugural investment letter, where I will discuss the intuition behind quant trading and the performance of our flagship strategy, Yi Sun-Sin, since the launch of Project StraBerry. I hope this letter provides you with a useful summary, valuable insights, and answers to any questions you may have.

Intuition behind Quant Trading

What is quantitative or "quant" trading?

By definition, it is the use of mathematical models to make trading decisions. It involves the use of computer programs to analyze financial data and identify trading opportunities, and to execute trades automatically based on predetermined rules.

Okay, let’s break that down into smaller — more digestible— pieces.

Imagine a gambling scenario with a winning ratio of 51%. If you win, you gain $100K, while losing costs you -$100K. Would you bet on this game?

To help you answer this question, let's do some math. The expected value of betting on this game can be calculated as follows: 0.51 * $100K + 0.49 * (-$100K) = $2K. Does this number give you the confidence you need to participate? Yes or no, depending on your risk tolerance. Whatever your answer is, one cannot deny the fact that the risk is still there.

Now, let's imagine a scenario where instead of playing once with $100K at stake, you have the opportunity to play the game 1,000 times with $100 each time. Does this increase your likelihood of participating? Would you feel safer participating?

If your answer is yes, you either have good intuition or a solid understanding of statistics, because the law of large numbers states that if you repeat an experiment independently many times and average the result, you will get closer to the expected value.

And that is exactly what quant trading is about: i) Use data to make an effective prediction that outperforms random trading with a winning ratio of 50%, and ii) execute it repeatedly.

Sounds quite simple, right? Well, yes and no.

Yes, because all you need to do is find a strategy that yields a winning ratio of 50+X%, where X does not have to be very large.

However, there are still numerous factors to consider in order to realize profits in real trading. I will delve into these factors in a later discussion.

Strategy Review: Yi Sun-Sin

Trading period: 2023-05-19~2023-06-03 (16 days)

Average trade count (daily): ~1300 times

Average size of trading universe (daily): 40~50 cryptocurrencies (*)

Performance Summary (**)

⁠

(*) "Trading universe" refers to the set of assets (e.g., cryptocurrencies) that a trader or investment strategy focuses on. Typically, it is manually selected by a portfolio manager, but in the case of Yi Sun-Sin, it gets determined by the underlying logic of the strategy itself. (**) The performance shown above represents the average return of our StraBerry users' accounts, with minor variations observed among them.

Let’s Dive In

Below, I present summary statistics of Yi Sun-Sin based on the real trading activity in my personal Upbit Crypto Exchange account. As an investor in Yi Sun-Sin myself, I would like to share my personal observations and thoughts on the performance of the strategy to provide you with additional insights.

(Note: While my personal history with Yi Sun-Sin dates back to April 2021, my trading with Sun-Sin as part of SQRT’s prop trading began on January 1, 2023.)

Juho’s Personal Trading Dashboard

Yi Sun-Sin, Jan 1-Jun 3, 2023

⁠

🔺 Each StraBerry user will gain access to a personal trading dashboard similar to the one above. Please stay tuned for our email, which will contain the website link and instructions for signing up.

Graphs

Daily Cumulative Profit & Loss (PnL): This graph represents the cumulative sum of one’s daily profit and loss. In other words, it shows the cumulative sum of a change of one’s daily net balance. If you look at 2023-03-01, for example, the 33% mark indicates that Yi Sun-Sin has generated a return of 33% since the strategy was deployed on 2023-01-01.

Weekly Profit & Loss (PnL): This graph presents a weekly performance overview, without considering the cumulative gains or losses over time. For instance, if you look at the final week of February 2023, the approximate 9% mark indicates that Yi Sun-Sin had generated a 9% return over the entire week.

Tables

%PnL: Equivalent to the return on investment. %PnL is calculated by dividing the change in one's net balance by the initial investment.

MDD: Short for “Maximum drawdown,” MDD indicates the maximum observed loss from a peak to a trough of a portfolio before a new peak is attained. The MDD of 8.78% refers to the significant drawdown of 8.78% from the peak in March 2023.

Sharpe ratio: A measure of risk adjusted return. Sharpe ratio is calculated by dividing a portfolio's excess returns by a measure of its volatility. The Sharpe ratio of 3.63 suggests that the annual return scale is nearly four times that of the annual standard deviation of return. (Note: Generally, a Sharpe ratio of 2 or above is considered quite good, although the evaluation of a hedge fund goes beyond a single metric.)

Fiat PnL: Refers to the change of one’s net balance measured in fiat (e.g., USD, EUR). In the case of StraBerry, the base currency is KRW. From the above table, you can see that I have made 23.5M KRW in profits since 2023-01-01.

My Assessment

While SQRT does not claim to be a financial advisory service providing investment-related advice (at least, not yet!), I will share some of the factors I personally consider when evaluating any given trading strategy, including Yi Sun-Sin.

Comparison with Other Major Indices

BTC: This line graph represents how much one would have gained or lost by holding Bitcoin (BTC) during this time period. BTC has experienced a significant recovery since the beginning of 2023, but Yi Sun-Sin's performance continues to surpass it.

Market Average: Yi Sun-Sin also continues to outperform the Market Average, which is determined by calculating the average performance of all listed cryptocurrencies on Upbit, including BTC, ETH, and a range of alt-coins, such as XRP, ADA, DOGE, and others.

By considering the collective performance of these coins and tokens, the Market Average provides a broader representation of the overall market trends and investor sentiment within the crypto space. It is interesting to note that while BTC shows superior performance compared to the Market Average over time, this trend tends to reverse during bull markets, such as the one experienced in 2021, as investors’ confidence or faith in alt-coins resurges.

Yi Sun-Sin vs. BTC vs. Market Average

Jan 2023-present

⁠

Yi Sun-Sin Over the Years (via Juho’s Upbit account)

April 2021-present

⁠

Beta Exposure

Beta exposure quantifies the level of exposure to a specific index, reflecting how sensitive an asset or portfolio is to the movements of that index. For instance, in the case of US stocks, they are typically exposed to US market indices, such as the S&P 500 or Nasdaq 100.

The beta coefficient measures the degree of sensitivity. Mathematically, it can be calculated as: beta = cov(r, r_index) / var(r_index), whereby r represents the return of a given asset or portfolio, and r_index the return of a reference index.

Yi Sun-Sin’s beta exposure to BTC and the market are as follows:

beta_BTC = 0.09

beta_market = 0.02

These numbers are pretty —I mean, very— low. In theory, even if BTC were to decrease by 10%, Yi Sun-Sin would only move approximately 1%. Certainly, this assumption may not always hold true, especially under extreme market conditions, but the degree of beta exposure remains a valuable measure for assessing direct exposure.

Reflections

Yi Sun-Sin has been below the high water mark since late April 2023. However, the strategy has endured deeper troughs over longer time periods in the past.

Despite recent sideways movement, Yi Sun-Sin continues to exhibit better performance compared to major indices, including BTC and the Market Average. Its MDD remains at a manageable level, consistently staying below 2.5% (compared to its historic drawdown of over 25%), not to mention its incredibly low beta exposure. Thus, I do not detect any significant worrisome signals.

Experiencing losses is always unpleasant regardless of the circumstances. (Losing sucks no matter what.) Even after spending several years in the trading industry, I myself am still learning to be completely at ease with losses, if that is indeed an an attainable goal to begin with. However, that is precisely why we are here for you. We remain steadfast in our belief in Yi Sun-Sin and are committed to standing by your side throughout the trading journey. Let's see what the next 14 days have in store for us!

Welcome 👋

Investment Letter

Intuition behind Quant Trading

Strategy Review: Yi Sun-Sin

Let’s Dive In

My Assessment

Reflections

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