Maximizing Returns Per Unit-of-Risk

Published on
January 30th, 2017
42 minutes

Maximizing Returns Per Unit-of-Risk

The Interview ·
Featuring John Netto

Published on: January 30th, 2017 • Duration: 42 minutes

Protean Trader and author of The Global Macro Edge, John Netto, joins Real Vision for a passionate discussion of trading strategies in the context of the evolution of global macro. Levelling the playing field with the billion-dollar club, John dissects performance analysis and risk in a volatility minefield, to apply the best trading styles to the current market environment. Filmed on January 4, 2017 in Santa Monica


  • FP
    Fred P.
    21 May 2017 @ 20:56
    I reached out to John by email with some questions I had and I was exceptionally impressed with how promptly and how thoroughly he responded. To be honest, I had not heard of him before I watched this video so my subscription to RV is adding to the field of investing experts I am exposed to and that sure is a positive.
  • FB
    Florian B.
    12 April 2017 @ 15:04
    I emailed John and instantly received the PDF, thank you very much!
  • AT
    Aaron T.
    7 March 2017 @ 09:18
    Thanks again RV - and thank you John; your enthusiasm is infectious. Cheers for sending through Ch3. of your book - greatly appreciated.
  • JN
    John N. | Contributor
    22 February 2017 @ 21:45
    Update - The Global Macro Edge eBook is now available in iTunes in the Apple ecosystem.
  • RT
    Rune T.
    9 February 2017 @ 03:27
    Thanks John for sending the free chapter and index! much appreciated.
  • JN
    John N. | Contributor
    7 February 2017 @ 13:46
    That's a great synopsis Robert. It's funny that for a guy who has a lot of formal formulas and processes that I don't have one with respect to that particular question. But you are spot in in that those three points are what has to be considered by one. And let me be clear, I have a lot of colleagues who do very well and are very happy running money. We all have to ask ourselves those three questions with respect to where we are in our lives. Right now, I enjoy running my own capital in house and this book tour. Being able to speak about manager compensation through the prism of a Netto Number and return per unit-of-risk is intoxicating because of the response it has received and I genuinely think we can redefine our investment industry for decades to come if the contents of this book are put into place. I mean that not only in the alternative investment industry but in all active management services. So either way, there is a lot of fulfillment that comes from this spiritually. And I have found, not that I'm necessarily looking for it, when you are out doing great things with great people, business opportunities pop up as well in an organic way. - JOHN NETTO
  • RA
    Robert A.
    6 February 2017 @ 00:02
    I think Grant (and this is for you along with all of us) that John's most valuable bit of advice was his response to another commenter and the intuitive question as to why he isn't running a large amount of money based on his strategies and track record. How "big" do you think you can get and what is your motivation? Perhaps you just want to see just how high you can put the peg on the wall---and that can make a lot of sense for many, but the next step should be, in human terms, an analysis of the following factors; how much is the effort taking out of you, how much reward are you getting by doing it and finally how much monetary reward is there and how much risk is associated with each monetary increment. I strongly beloeve that for all of us it is simply a confluence of these 3 factors. John knows himself and he knows what would be associated with running 300-500 mm. We are all "unconstained" until we choose to be so and have volition over our lives.
  • JN
    John N. | Contributor
    5 February 2017 @ 21:28
    VIRESH - Thank you for the feedback. RAYMOUND - I think everyone has their own trading style. The key takeaway from this is that whatever your strategy, time horizon, or investment objective, look at it through the prism of the returns per unit of risk.
  • VK
    Viresh K.
    5 February 2017 @ 19:58
    So much energy, enjoyable interview
  • RW
    Raymond W.
    5 February 2017 @ 14:15
    John .... If more and more people start trading like you do will this not arbitrage away the pofitability of your strategy?
  • JN
    John N. | Contributor
    2 February 2017 @ 19:46
    Daniel G - With regards to explaining to clients what I do. I trade my own capital and run all of my strategies in house. If I was to explain to a colleague in the finance what I do I would explain that I run my own family office using a set of processes developed internally over the years that gives me an edge in identifying investment skill as well as market opportunity via measuring things on a return per unit of risk basis. As you can imagine with my performance and disposition, I've been approached multiple times about running capital. I'm not registered with any regulatory body nor do I hold myself out in any capacity. It's my strong opinion that when you back out all of the numbers, you need to be running close between 300-500 mm to sort of make it worth it. What's the point of making a certain amount a year and have a full time headache (regulatory, investors, statements, meetings, etc.) as well as the potential strategy decay that comes with the increase in AUM if you can make less than that and have a life, as well as no regulatory or custody risk that comes with managing other peoples money.
  • JN
    John N. | Contributor
    2 February 2017 @ 19:38
    Sajad - Thank you for the compliment...and yes, kids made fun of the size of my head growing up. It's still hard to find hats that fit. :)
  • DG
    Daniel G.
    2 February 2017 @ 18:41
    How would you explain any of what you do to a prospective client?
  • SC
    Sajad C.
    2 February 2017 @ 03:38
    Brain the size of a planet. Good interview, probably worth watching twice to digest the content. Positive guy. Will look into the book.
  • GM
    Gerald M.
    2 February 2017 @ 00:18
    I really enjoyed this interview. I contacted John with a question and he responded right away. I didn't think I would be buying another trading book for a while but I am getting John's book. John is super passionate about what he does and it comes across in the interview. Thanks RVTV for bringing him on!
  • GM
    Greg M.
    1 February 2017 @ 14:50
    I loved the interview. Tons of enthusiasm and energy. I am definitely going to check out the book. I need to get out of my crappy commercial real estate job and get back into the trading / securities industry.
  • CB
    Cliff B.
    1 February 2017 @ 12:09
    Very interesting. Need to do more research to undstand these concepts.
  • JN
    John N. | Contributor
    1 February 2017 @ 08:38
    Craig and Everyone. We are looking to potentially put out an eBook in Q4 of 2017 (November/December). Those that get the hardcover will get a substantial discount. I completely understand the desire to get a 5 lb book in a more ambulatory format. We had some huge issues with Amazon, who keeps 65 percent of the price of an ebook above $10 so we are coming up with another solution to have ready by later in 2017. Thanks again - JOHN NETTO
  • CA
    Craig A.
    1 February 2017 @ 08:05
    Is there an ebook version of the book? Been trying to find it online since its a huge book and its way easier to just download it. Does anyone have any clues?
  • CE
    Christopher E.
    1 February 2017 @ 06:49
    Amazing interview. Such energy and a tumble of ideas and insights. Thank you RVTV for this peek into high-end trading methods. And thank you John for emailing Ch.3 laying out your trial period audited performance.
  • HF
    Hamish F.
    1 February 2017 @ 04:22
    Thanks John for flicking through your chapter for review. Worth doing if anybody is keen to review the book.
  • sm
    sam m.
    1 February 2017 @ 04:05
    JN, thanks for sending through chapter 3 and the TOC; particularly since it was post-midnight!
  • TW
    Tom W.
    1 February 2017 @ 02:03
    John, Thank you for your reply! I misspoke in my previous comment regarding TOS -- Options Hacker is okay , Spread Hacker is really not very useful for finding optimal spread setup ups, and I have compensated with my own Excel solution. Thanks again! .... Tom
  • JN
    John N. | Contributor
    1 February 2017 @ 00:14
    ANDREAS - I'm just reading this back and want to clarify one point. The variance on both up days and down days will likely be lowered from having a risk budget. Because outsized gains often times come following outsized losses, or the snapback situation you eluded to. I just reread my post to you and it was a bit confusing what I said. Thanks again - JOHN NETTO
  • JN
    John N. | Contributor
    1 February 2017 @ 00:09
    TOM - you hit a lot of points and thank you for sharing some of your process. A risk budget is essentially a stop on a manager, strategy, portfolio, and trade. This concept isn't new or novel. The process of having a way to measure performance incorporating this is through the Netto Number. It sounds like you are making the most of your TOS API situation and have a process in place. I layout a number of sources I use in my book (chapter 8 and 18) to get a handle on the macro narrative. One is Neil Azous who has been a guest on RV. You can follow him on twitter as well. He does a great job of coalescing things and his newsletter is of great benefit. I also go into a very introspective process in the book about what questions I ask and how I dissect macro information. I hope this helps. Thanks again for posting - JOHN NETTO
  • JN
    John N. | Contributor
    1 February 2017 @ 00:04
    ANDREAS - Thank you for the comprehensive post. Your first point on getting out before a major turn is something that often gets asked to me. As I outline in Chapter 21, "Risk Budgets - The X Factor in Investing", your size will be smaller for the turnarounds but this is the price of mitigating tail risk. What also happens interestingly enough is the variance of your portfolio tends to drop as well. Why you ask? Because following a very vanilla risk budget sizing algorithm you are in fact lowering position size as you approach your risk budget and increasing as your size increases. So many portfolios experience huge variance days on both the down and the immediate snap back. So by reducing size around key thresholds you are also lowering the chances of a liquidity event. While I'm only scratching the proverbial surface with this response, I wanted to get back to you at some level. Regarding your 45 degree equity curve. I sure don't have one but I can sleep at night because I know what my risk is and define every trade, investing, and deployment of capital to those strategies from that perspective. So I disagree that you have to take a 70 percent drawdown and let things run in a pure passive way. I'm sure you've seen the recovery scales so prominent in many avenues that show when you lose 5 percent you need to make 6 to get back to even, down 20, you need to make 25 to get even, down 50, you need to make 100 to get even etc. That's why I talked about diversification through true any rate, please email me after you read the book. I'd be curious to hear your feedback.
  • TW
    Tom W.
    31 January 2017 @ 23:25
    Hi John, thanks for your reply and offer to answer questions, and also for sharing the concepts in your book. I’ve viewed the video a second time, and that helped me to get my head around it more. I like the concept of strategy diversification (Strategy Grid). Return on unit risk – is that the same as expected return? Isn’t a risk budget effectively a stop loss on an account or money manager? What goes into the Netto number calculation? I think I heard that it is based on historical volatility and sharp ratio over a past period of time. My primary experience with options strategies are short credit spreads, often paired into iron condors, to extract value from volatility and theta decay. My favorite underlying are SPX, RUT and NDX as you can put sufficient money to work without huge contract sizes and they settle in cash so you don’t risk ending up with short positions between the strikes if you hold to expiration. It is hard to make reasonable risk/return with the extreme low volatility of the recent (actually, even not so recent) past. I’ve also tinkered with mining volatility around earnings events for stocks like AAPL by 1) long options, a few weeks in advance of earnings, either at the money or somewhat out of money in the direction that I anticipate the price might go in hopes of selling at higher volatility (and maybe closer to strike) just before earnings release, or 2) short credit spreads (or calendar spreads) just prior to earnings to take maximum volatility premium. I use Thinkorswim for trading and options analysis to a point, but it has its limitations when trying to find optimal setups. TOS Option Hacker is useless – I’ve created my own tool using Excel with integrated TOS data, but it has TOS data quantity limitations that have to be worked around. The thought of trading on gamma is new to me, and I’ll have to look into that more. Also, trying to read macro indicators is something that I don’t have much experience with, either, and am trying to learn on RVTV. Again, Thank you! -Tom
  • SS
    Steven S.
    31 January 2017 @ 23:20
    Oh okay. I'll get the book and learn from it. But he still talks as fast as a bookie does. Not to be negative. I enjoyed the interview.
  • HJ
    Harry J.
    31 January 2017 @ 21:40
    Milton does this help?
  • AH
    Andreas H.
    31 January 2017 @ 20:48
    Very good interview, I will get the book, love to learn, so I like interviews with book recomm. Risk budget interesting, but you might pull the plug just before the strategy turns and performs well or even very, very well. And the dominant trading system works in (almost) every market condition, especially with small portfolios there are some very nice niches to be played. I stick to the risk patters of Buffet, where vol. and drawdowns are not risk but only long term capital loss and underestimating performance / growth posibilities are defined as risk (only works with no derivatives and no leverage otherwise you get out of business fast!); at the end of the day you get to make money to take risk, if you can not do this, trading and investing is not the right thing for you, because your risk budget might be so low, that there is no way to make any money. So you better work on your mind and psychology to widen your risk profile to be able to make any money and simple accept reality. A 45 Degree captital curve with almost no drawdown is the pipe dream of the whole hedge fund industry that will be never be fulfilled (but makes a lot of managers rich selling a dream to investors), basically a waste of time. If you are not able to stomache a 50% or even 70% Drawdown and think you can avoid that with a stop loss (not matter what kind of, market stop loss, "manager" stop loss, virtual stop loss etc.) you are just fool and lye to yourself (and the hedge fund manager is feeding this dream). It happened, it can happen again, it will happen again, not great mind in the world is immune to black swans. So yes, great concept, but for my own privatly traded portfolio I like it much more KIS (Keep it simple).
  • DF
    Dave F. | Contributor
    31 January 2017 @ 20:35
    Great stuff John....we are long overdue for a phone call. Dave Floyd
  • RM
    Repost M.
    31 January 2017 @ 19:21
    Thanks for the quick response of the book sample. Good interview for those with an institutional background.
  • NC
    Norman C.
    31 January 2017 @ 18:36
    Top notch interview - thanks RV. Biggest takeaway is that you have to be flexible in your trading. If it's not your kind of market, raise cash or sit on the sidelines until it is. This book has been on my to buy list and definitely have to order now. Good job John.
  • HP
    Harry P.
    31 January 2017 @ 17:18
    Really enjoyed the interview, also received chap 3 from John, looking forward to diving in. H
  • SC
    Sau C.
    31 January 2017 @ 17:16
    Interesting Interview. I emailed the author and he sent me a copy of chapter 3. With a starting risk budget of 100k on a 1 million account, I'm guessing the risk budget of 10% scales as the account grows? For those who are having issues understanding, the Netto Number is an attempt at incorporating "heat" taken during a trade into volatility calculations to provide a different perspective of risk adjusted returns. A better one IMHO. Looking forward to reading the rest of the book
  • RM
    Richard M.
    31 January 2017 @ 16:16
    John, great interview! Very interesting and novel material. Thanks for sending me the chapter 3 for review too!
  • KO
    Kieran O.
    31 January 2017 @ 16:01
    I get along just fine without a Bloomberg Terminal. Although I'm not a day trader. I love his comments on path dependency. Looking forward to reading the book.
  • JN
    John N. | Contributor
    31 January 2017 @ 15:48
    Gordon - You don't need a BBERG terminal to run options studies. Think or swim, Optionshouse, etc. have APIs that you can get into and plug data. 20k a month is more than sufficient for at trial regards to fat tails, that plays right into the risk budget concept. That's the whole point. Defining your risk in advance so that should a fat tail happen, you have risk parameters in place to help alleviate that as much as possible. Nothing is for certain but not having a risk budget is a pathway to getting black swanned... - John Netto
  • GS
    Gordon S.
    31 January 2017 @ 14:55
    Very interesting interview, loved the passion. Thanks RV and John Netto. Loved the concept of the investment landscape flattening. Unfortunately a Bloomberg Terminal is still $20k/year. Even with $100k that would still require at least a 20% return to justify the investment. As a math student I am very interested in anything involving greeks, but to be honest, that landscape flattening is still nowhere near of arriving to the “average” person, something also often complained about here on RV. I can barely find a bank where I can trade efficiently options, let alone be able to visualize any greek (spoiler alert: so far none)! And given the strategies you are mentioning you know that without access to proper data, any trading attempt is futile. (Oh and I forgot to mention trading fees on small trade sizes too?) In that regard, would you have any recommendations for someone wanting to start with for example $20k? And you mentioned fat tails several times, what is your current strategy to protect yourself against those? Or take advantages of these? those gamma trades? And I couldn’t disagree more about the future of central bank intervention (I share the view of the Tylers of ZH and for example Bill Gross, that the real printing hasn’t even started yet), the future will tell.
  • RO
    Richard O.
    31 January 2017 @ 14:36
    Informative but frightening for the amateur investor. Nonetheless a valuable insight.
  • RC
    Ryan C.
    31 January 2017 @ 14:10
    Very interesting discussion about risk budgeting. Certainly something that needs to be given more focus by allocators from both a selection of manager perspective and also a remuneration tool. Reached out to John on Twitter and he's sent me through some further details. Great stuff altogether.
  • DG
    Daniel G.
    31 January 2017 @ 14:05
    I emailed John for the chapter 3 preview and he sent it right away. Impressive personal response from a clearly very busy professional. Cheers!
  • VS
    Victor S. | Contributor
    31 January 2017 @ 13:12
    Gave a thumbs up as he is an out of the box thinker -new ideas ...
  • BP
    Bryn P.
    31 January 2017 @ 11:33
    @John Netto, thanks for this great presentation and for personally emailing me the sample Chapter 3 & Index PDF so quickly ( ). Much appreciated.
  • JF
    Jalal F.
    31 January 2017 @ 11:31
    Great interview, the 'Netto' number really struck me as an amazing way for allocators to actually reward 'risk-adjusted returns' . Also got a quick reply from John on his sample chapter of the book
  • AD
    Anton D.
    31 January 2017 @ 11:17
    Requested the sample chapter and John personally responded with a copy of Chapter 3, the table of contents, and the index, almost immediately, despite brutal time difference between our locations! Thank you!
  • AD
    Anton D.
    31 January 2017 @ 10:37
    Fantastic! The more animated John got, the cooler Grant became. Must be British roots response. I actually though John was going to jump out of his chair with the words "embrace" around min.3, but he managed to control himself. Keep up the energy and authenticity level RV!
  • BM
    Bryan M.
    31 January 2017 @ 07:23
    Brilliant! I'm an old fashioned gold bug but hey...when you listen to someone like John who is so ebullient and passionate about his subject matter, just have to smile. As for the book plugging on Real Vision...I'm all for it. I like finding new information to dwell on.
  • RH
    Rob H.
    31 January 2017 @ 05:46
    I for one don't like the interviews when they have a book to plug.
  • BN
    Brian N.
    31 January 2017 @ 04:51
    Loved the interview, don't get enough options experts now a days, Mathematically assessing volatility and strategies involving Greeks are generally harder to do because to long/short the vega you'd have to balance both gamma and depending on direction you'd have to short/long remaining delta balance (correct me if I'm wrong) not to mention inter market plays involve rue as well. Phenomenal, I rarely comment but I had to on this, will definitely check out this book.
  • JN
    John N. | Contributor
    31 January 2017 @ 03:25
    Tom and Peter. You mentioned that you had a hard time following what I was saying. If you have any questions from the video, please ask and I'd be happy to clarify any points. I threw a lot out there and think there are some important concepts that I would be happy to clarify. - John Netto
  • JN
    John N. | Contributor
    31 January 2017 @ 03:10
    Let me also respond to the trading level question. The 100k was the risk budget and I traded that as if it was a 1 mm account. The complete explanation of this is available in Chapter 3 as outlined by Mike Coglianese. This sample chapter and index is available for free. Just email and I'll have the PDF sent over to anyone who wants to read it.
  • DM
    Daniel M.
    31 January 2017 @ 03:10
    Love that passion!!!! Don't listen to the comments Real Vision. Never dumb it down! We want more!
  • JN
    John N. | Contributor
    31 January 2017 @ 03:06
    This is John Netto. I want to respond to point 1. I generated 3.1 million in profits over 6 years. The performance is outlined in Chapter 3. You are absolutely correct in that I misspoke in the interview referencing "commissions" and I'm sorry for any confusion that may have caused.
  • TR
    Thomas R.
    31 January 2017 @ 02:52
    If John Netto is set up to respond to comments and questions, here is my question - At around the 19:20 mark of the video John gets into his 6 year track record from the beginning of 2010 to the end of 2015. He basically states "...$100,000 in his own account, traded on a million dollar trading level and generated $3.1M of commission dollars on it" I'd love to get confirmation/clarity on the use of the term "trading level" and then the reference to "$3.1M of commission dollars". One million dollar trading level on an initial $100,000 would presumably mean 10x leverage. Please confirm this as correct or explain otherwise. Then does ",,,generated $3.1M of commission dollars on it..." mean John turned $100K into $3.1M in six years which is what I think he wanted to communicate. The reference to "generating commission dollars" would seem to refer to transaction volume and commissions earned and have nothing to do with whether the account made money or not - other than the $100K would have had to generate substantial profits in order to sustain itself against $3.1M in commissions. Just looking for clarity. Great discussion!
  • PM
    Philip M.
    31 January 2017 @ 01:02
    Wowser....i wish i had the brain power to understand much of what was said....i think i understood some of the concepts....and id give this guy my money to invest...imteresting!
  • GH
    Gregory H.
    31 January 2017 @ 00:30
  • MS
    Max S.
    30 January 2017 @ 23:40
    Excellent video. Can you add Volatilty as an asset classes to cover. It has gained massive significance over the past 5 years and probably only a few subscribers have deep knowledge on Vol trading
  • PR
    Peter R.
    30 January 2017 @ 23:22
    Sorry, I have no idea what this guy is talking about. Can you run this through Google translate into something understandable?
  • TW
    Tom W.
    30 January 2017 @ 23:03
    Too complicated