the FOUR PILLARS
We see the financial markets as being structured, inter-related, driven by local and global macro-economics and fundamentals, and driven to extremes by the often emotional behavior of market participants.
On the other hand, we do not see the markets as being very efficient or random, i.e. we are convinced the "Efficient Market Hypothesis" and "Random Walk" and their applications are bankrupt ideas.
Our Absolute Return solution aims to expose these market structures, predict and identify market trends using the 4 Pillars below, and align investments dynamically to take advantage of opportunities that have the highest Reward-to-Risk profile. We have cut the teeth of these Pillars through real-time investment management since 2007, a period which covers two of the most significant Bear and "Bull" markets of the last 100 years.
PROPRIETARY FRACTAL-BASED PREDICTIVE MODEL
We have developed an objective and adaptive Fractal Model that predicts market turning points or inflections, maturity of the current trends at different degrees, and the likely trajectory of future trends in all major financial and commodity markets. Some key breakthroughs we have made include the following
- Underlying indicators that objectively reveal the fractal pattern inside the market’s structure
- Unique inter-market analysis that determines the structural correlation between major currency, bond, equity, and commodity markets
- A comprehensive macro-economic overlay that aligns the global macro storyline with the fractal pattern and inter-market storyline, and which significantly increases forecast accuracy.
- Pattern recognition to identify "rhyming" periods with structurally similar price patterns at similar or different time-scales
We are also improving the algorithm with new market and macro data, i.e. evolving and refining the model as it learns from the market in real-time. This model and methodology has been back-tested to 1929, and has been used in real-time since 2007 to identify opportunities with the best reward-to-risk and determine the best entry/exit points in the context of managing real money.
KEEN PULSE ON GLOBAL MACRO TRENDS
The goal of our Macro analysis is to arrive at a coherent perspective and storyline which then acts as an overlay for our Fractal and Technical Analysis to help us determine the probability of potential scenarios.
The primary driver and storyline in Secular Bear markets has always been from Global Macro rather than from fundamental or cyclical performance of sectors and companies. We have seen ample evidence of this from the aftermath of the Internet crash in 2000-2002, the in-discriminate rise of the markets along with the US housing boom from 2003-2007, the Sub-Prime Crisis and its global aftermath in 2007-2009, and then the global Central Bank QE driven re-flationary boom since 2009 where the rising tide has risen all boats. Even the bull market since "2009" can be divided into distinct phases with different macro themes.
- The magnitude, application, and location of QE and Central Bank intervention
- weak links in the Sovereign Debt chain
- QE's un-intended consequences on Commodity Prices and Emerging Markets
- the aftermath of years of indiscriminate lending in China
- Dropping Bond Yields including Negative Interest Rates and Carry Trades
- The beginning of inflation fears and rapidly rising Yields, with the new Trump administration
We monitor key global macroeconomic indicators to identify the headwinds and tailwinds to major economies that are critical for global growth, and analyze to determine the relative importance and imminence of these factors.
We also have a widely cast net of News and Twitter feeds that brings in the perspective of some of the best minds in the industry that we use to ensure we have not missed anything of significance.
CUTTING-EDGE TECHNICAL ANALYSIS
Two examples of original technical indicators we have developed to validate and improve the confidence and accuracy of our fractal forecasts are
1. A “2nd Derivative of Price” model and methodology that forecasts (provides a pre-trigger signal) and then confirms trend changes in an asset’s price at multiple degrees of trend.
2. An important modification to the classic Support and Resistance level analysis, where a significance to the Support or Resistance level is assigned based on how it ties to the Fractal structure of the market. This helps project the probable shape and end of the current or forecasted trend in the asset or market being analyzed.
We also utilize top performing trend-following strategies which have proprietary tuning enhancement and are geared for the market environment at hand, and a composite fundamental/technical strategy incorporating Relative Strength in the Market Neutral portfolio. Our trend-following strategies are based on the proprietary TrendFlex system developed by Baseline Analytics and captured in our Market Tour review performed on the markets regularly.
Even if we maintain the right perspective to ascertain the market's direction, and use the best strategies to maximize the harvest from the trend, achieving the goal of consistent Absolute Return is impossible without objective and disciplined position and money management that controls the risk profile and equity draw-downs in the portfolio to meet the portfolio and client objectives. Our risk management approach is anchored in the four tenets of dynamically managing the 1) position size, 2) duration of the trade, 3) confidence (or probability) of the move, and 4) the asset class involved to maintain an optimum reward-to-risk ratio at the position level while controlling the draw-downs at a portfolio level. We also use data science approaches to study the historical performance of our strategies and adjust weights to achieve the desired portfolio performance.
Disciplined and sophisticated Risk Management
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