There have been quite a few winners and losers in the immediate aftermath of the 2011 crash (does this move have a name yet?), and one of the biggest losers has been discretionary trader Dighton Capital. We posted their ‘defense’ of their position two weeks ago, but things went terribly wrong since then, with a dramatic move higher in the Swiss Franc causing losses of more than -50% for Dighton in August (on top of -30% losses in July), putting the drawdown on their composite track record at a disturbing -76%.
What are the lessons to be learned from this flame out? One, discretionary managers without set risk per trade limits carry a unique set of risks which aren’t shared by their systematic counterparts (namely that they can/will hold onto a trade a little longer if they have a heavy conviction). Two, contrarian/counter-trend/mean reversion strategies carry unique risks (the market may not mean revert). Three, be wary of investing in a managed futures program doing something different than the typical managed futures trend following type strategy
From Dighton Capital’s disclosure document:
The Dighton Trading Program (formerly known as the Swiss Futures Trading Program) is a combination of systematic, technical chart analysis for the markets, the interpretation and analysis of economic and other fundamental data and use of discretion based on the experience of the Advisor. The Advisor will trade most of the liquid US future markets like currencies, stock indices (especially Mini S&P), bonds and notes, energy, corn, grains and other commodities such as cotton. The Advisor does not initially plan to trade foreign futures or options contracts but reserves the right to do so at a later date. The Advisor reserves the right to trading in any futures market. The Advisor analyses thoroughly the charts of these markets every week and monitors them then during the week.Chart analysis techniques include (but are not limited to) wave analysis (Elliot Wave), W.D. Gann principles (angles), Fibonacci retracements, Time cycles, Volume, Trix Indicator, divergences, and pattern analysis. In general, the Advisor tries to locate points where to buy in markets that have fallen and where to sell in markets that have risen. By this the Advisor is trying to buy when prices are low and to sell when prices are high. This approach is trend anticipating but not really counter trend. When a position is established the Advisor attempts to let the profits run and attempts to exit when the market gets to a point where a reversal in the trend could be expected.
A Ouija board might be better?