Standard Diversified Strategy

 

Simple Version

  • We attempt to achieve long-term absolute and risk adjusted returns superior to traditional investments.
  • We do this by capturing emerging price trends across diverse liquid exchange listed markets.
  • We attempt to limit risk and cut losses short when trends fail to persist.
  • We are able to participate in both bull and bear markets.
  • We use a systematic, quantitative, testable, and repeatable approach.

 

Why

Someone would invest with ACT if their goals are to:

  • Diversify exposure to stocks and other traditional assets in their portfolio.
  • Potentially reduce overall portfolio volatility.
  • Potentially increase risk adjusted and absolute returns for a portfolio.
  • Access potential profit / risk opportunities across a wide variety of  markets, rather than relying only on stocks.
  • Access potential profit / risk opportunities across both up-trending and down-trending market environments, rather than relying solely bull markets.

 

Purpose

Our purpose is to harness diversified opportunities, preserve upside equity potential and limit downside risk in an uncertain world.

 

Investment Philosophy

Price trends form and are exploitable due to a number of factors including behavioral biases, price-insensitive market participants such as hedgers, and market adjustment over time to changing underlying factors.  Our view is that long-term evidence suggests a diversified trend-following strategy can perform well through various market environments, but in particular during persistent divergent periods.

The future is unpredictable.  Change is the only certainty.  Price trends both up and down have formed across diverse markets throughout human history as a symptom of change.  Trends often begin without warning or recognition.  Trends often last longer than expected only to end when many believe they will continue indefinitely.  Meanwhile, society as a whole might have difficulty recognizing and learning from these repeating themes.  Individual assessment of risk is also unstable and rarely quantified.  These characteristics of markets pose significant challenges for investors.

Relying on a perpetual bull phase in any one market, sector, or grouping of highly correlated markets carries significant risks and increases the fragility of a portfolio.   Alternatively, a systematic process designed to handle price trends in diversified markets has the potential to reduce these risks while also benefiting from change.  A robust systematic process for an uncertain world is called for.

 

Process

ACT utilizes a quantitative, systematic, and repeatable process aimed at capturing significant portions of persistent price trends across diverse markets.  Our systems are designed to cut losses short when price trends fail to persist.  ACT has ability to position long, short, or flat across diverse markets allowing placement of risk during both bull and bear phases.

ACT’s strategy has the best opportunity for profit when we are able to identify and align with persistent medium to long-term price trends early into their development.  Conversely, our strategy will experience drawdowns and loss to equity when markets we trade are in a trend compressed environment.  ACT attempts to defend capital by systematically sizing positions, and by exiting positions which have failed to produce or are causing specific levels of loss.  ACT does not attempt to pick tops or bottoms.  ACT is able to position long, short, or flat across multiple liquid exchange-listed futures markets, including foreign currencies, grains, soft commodities, energy, metals, live stock, interest rates, and equity indexes.  A great analogy is surfing ocean waves.  We are attempting to ride financial waves or price trends while quantitatively and systematically managing risk.  We believe our process is very natural and in harmony with market behaviors.

 

Systematic, Quantitative, Repeatable

Systematic means we act according to a set of methodical rules which have been put together in a complete system.  Quantitative means we have measured mathematical values for our rules and system parameters.  Decisions of what contracts to include in the portfolio at any given time, whether to position long or short, and what position size to use are decisions which are made systematically and quantitatively.  Likewise decisions of when to exit portfolio positions for small loss, small gain, or for larger gain are also systematic and quantitative. Because decisions are quantitative and systematic, our process is repeatable and testable.

 

Risk Management

Risk management is at the core of any  robust investment process.  Capital preservation enables investors to stay in the game.  ACT attempts to risk only small linear losses with each individual position.  We also attempt to limit loss at the sector and portfolio levels.  Meanwhile, exponential growth is allowed for winning positions. Winners stay and losers go.  Ability and willingness to accept and cut losses short is key to capital preservation.

 

Markets

ACT trades liquid exchange-listed futures contracts in the following sectors:  Grains, Soft Commodities, Meats, Energy, Metals, Currencies, Interest Rates, Equity Indices.

 

Goals and Expectations

Our goal is to produce exceptional long-term compounded returns while achieving non-correlation with stock, bond, long-only commodity, long/short equity strategies, private equity, and real estate.  We believe non-correlated assets and strategies which can stand on their own generally add to the robustness of an overall portfolio.  It is also our opinion that ACT’s systematic strategy, used alone or as part of a larger diversified portfolio, has the potential to achieve superior risk adjusted and absolute returns when compared to a buy and hold approach consisting of more traditional assets.

Although our expectation is to successfully compound capital, we also expect to endure periods of drawdown and loss.  Knowing ahead of time when periods of gain or periods of drawdown will occur is of course impossible.  Some lumpiness is expected and normal in our return profile or equity curve.  Investing and trading are viewed as a marathon, not a sprint.  Belief in the robustness of the strategy led ACT’s Founder and Principal to move from testing phase to live trading phase with proprietary capital during a then present strategy drawdown.  Proprietary capital has also been added during subsequent drawdown periods with the intention of benefiting slightly from the drawdowns.  We never know ahead of time when these drawdowns will end.  No equity curve is a straight line.  Positive returns each day, week, month, or even each year are generally not possible.  Although there is no lockup period with ACT, an investor needs to have at minimum a three year time horizon.  More adequate would be a seven year or longer horizon.

There are no guarantees in life, and there is no guarantee we will be successful in our efforts.  There is risk of loss, and we expect to endure losing periods.  However, as a testament to his belief in the long-term potential, ACT’s Founder and Principal trades his own capital alongside client accounts utilizing the same exact systems.

Surf 1