Laurence Fletcher at Reuters Pens Diss Headline; The Media Still Marginalize Trend Followers with “Black Box” Line

Laurence Fletcher of Reuters writes “Black Box” Hedge Funds Profit in Volatile Markets”:

LONDON (Reuters) – Hedge funds run by sophisticated computer programs are profiting from large falls in stock markets and a rocketing gold price this month, even as funds managed by human beings struggle to cope with high market volatility.

Insiders say so-called managed futures funds [read: trend following], which try to latch onto market trends, are making money from declining bond yields and falling equities, as investors seek safe havens amid the eurozone debt crisis and after the U.S.’s credit rating downgrade.

These “black box” funds are up 4.2 percent so far this month, according to Hedge Fund Research’s HFRX index, while the average hedge fund is down 4.0 percent and managers betting on rising and falling stock prices have lost a hefty 7.3 percent on average.

Why does he use the word “black box”? If he was just “reporting” he would not immediately use a pejorative to describe trend followers like Winton. Bottom line, trend following is making a killing because it is sound trading strategy that performs especially well when the rest of the world ***** their pants. Why is THAT still news after all these decades?

Aug 25th Note: I asked Laurence why he used the term. His reply:

Hi Michael, thanks for your email. I’ve used ‘black box’ as a quick way to describe to the man on the street what computer-driven funds do. Why do you ask?

I asked back, “But how does that tell them? Meaning, how does the word black box tell folks what Winton does?” No word yet.

12 thoughts on “Laurence Fletcher at Reuters Pens Diss Headline; The Media Still Marginalize Trend Followers with “Black Box” Line

  1. We should applaud these clowns. These are the people who buy what we sell and sell what we buy and therefore make our profits for us.

  2. There is no box blacker than a discretionary trader’s head!

    Why do people think a robust system could possibly be INFERIOR to some guy making gut calls based on ego, emotion or predictions? He just calls it a black box because he is too ignorant to find out what they actually do.

  3. I don’t understand why “black box” should be considered pejorative. According to wikipedia a black box is “a device, system or object which can be viewed solely in terms of its input, output and transfer characteristics without any knowledge of its internal workings, that is, its implementation is “opaque” (black).”
    The reason its implementation is “opaque” is because it is the intellectual property of the system developer.
    Warren Buffet could not be considered a black box he uses discretion in all of his decisions.
    No? Am I missing something….

  4. Michael, your stuff is so good, that if EVERYBODY trend followed, it would arb out the opportunity. No need to to “push” it. Safe to say, if people ask what my partners and I do, it’s a “black box”.

  5. Perhaps he could have attempted to put a key part of the stratgy into perspective.

    When the S*@!$ hits the fan and correlations for more traditional investments go to 1, therby greatly eliminating the nbenefits from allocation models, these truly non-correlated strategies benefit from the chaos. A prime example of tht would be the last meltdown in 2008-2009. These Trend Following strategies have a long track record of offering investors outstanding returns when the stock market comes under pressure.

  6. One of the reasons I think ‘black box’ trend following (what ever you want to call it) works is because it gives a Trader a very small ‘OODA loop’ (Observe Orient Decide and Act).

    The OODA loop was a concept developed by USAF Colonel John Boyd for Fighter jet pilots. The premise being that an advantage can be gained by having a faster OODA loop than your opponent, even if your opponent has superior skills or firepower.

    Daily I read (free) market analysis from these advisers(clowns) down in New York. During the recent market fireworks they were analyzing a million different scenarios and data points/technical indicators that by the the time they had progressed through their OODA loop the moment of maximum opportunity had already passed.

    Now these advisers have more letters after there name than the alphabet and went to better schools than me, but my advantage lies in the stone-age simplicity of my system, and my ability to progress thought the OODA loop at lightning speed and always with a plan. LESS IS MORE.

  7. I am not saying that somebody could have predicted Buffett would be investing in BAC today, but it is a classic Buffett purchase: huge market panic, prices reaching 1 year and 2 year lows, a big market cap company with a huge price drop of 50% this year, a bank with government ‘guarantee’, desperately in need of cash,
    seems to be another one cast along the GS, GE die.

    I am just saying that this is not a big surprise.

    Also, while Buffett as a whole is opaque, the stock picking part of Buffett is not really as ‘black box’ as portrayed. His stock selection criteria have been articulated, tested and followed by others with similar results.

  8. Because Buffet is a value investor, BAC is cheap. Its cheap because the price has gone down alot. Does cheap = value?

  9. What about when Buffett tried to go against the trend a few years ago and got destroyed on the USD….was that a “classic Buffett” move?

    Going back to the “black box” definition, as Leda Braga from Bluetrend put it “these (systematic) strategies are far more auditable than you’ll ever get with an individual discretionary trader”

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