Quant investing: What is optimisation?

Hue Frame

Frame Funds Management

Optimisation of a trading strategy is the process of adjusting the parameters of a strategy to achieve the best performance.

Why should you optimise a strategy?

There are several reasons for running an optimisation of a trading strategy.

  1. Identify the best set of parameters for a strategy, which can lead to improved performance.
  2. Help identify any potential issues with a strategy, such as overfitting or poor risk management.
  3. Identify the best trade entry and exit points, which can improve the accuracy and distribution of the strategy.

Why shouldn’t you optimise a trading strategy?

There are some reasons against running an optimisation of a trading strategy.

  1. Computationally expensive, especially for complex strategies.
  2. Optimisation can lead to overfitting, which can result in poor performance on new, unseen data. This is because the optimiser may find a set of parameters that fit the historical data well but not the future data.
  3. Over-parametrised. When you run an optimisation, generally strategy complexity increases, which reduces sample size, increasing in-sample returns and performance statistics. This may not reflect well during out of sample testing.

In summary, optimisation of a trading strategy can lead to improved performance and risk management. However, it also has its drawbacks, such as the potential for overfitting and computational expense. 

It's crucial to use techniques like in-sample, out-of-sample, and walk-forward testing to ensure that the strategy is robust enough to changing market conditions.

To find out more about the specific quantitative strategies we implement, please call our office on 02 8668 4877.

This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund and the Frame Long Short Australian Equity Fund (Funds). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Funds is not a reliable indicator of future performance. The value of an investment in the Funds may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Funds may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

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