Robert Carver got his start in finance working at trend following firm AHL in 2001 during his final year of college. He was introduced to quantitative trading while at AHL and for the first time began thinking of finance in a systematic way. He later went back to AHL, working there from 2006-2013. His newest book is “Smart Portfolios: A Practical guide to building and maintaining intelligent investment portfolios.”
It took a lot of research and digging for Robert to decipher which financial tools available to traders were appropriate for him. He knew he was not the only trader with this problem so he decided to write a book laying out what he had found through his research. Robert gives actionable tips and guidelines for others who may need help finding what trading instruments are right for them. Robert also wanted “Smart Portfolios” to be a book for the average investor. He wrote it in a way that is not over complicated. Any trader, new or professional, can pick it up and find it useful.
Robert bases portfolio selection around three questions: 1. What should you invest in? 2. How much of your capital goes into those investments? 3. Do you make changes to your portfolio along the way? Whenever he receives questions from people, those questions usually fall into one of the above categories. There is never perfection when trying to predict how a portfolio will perform but Robert stresses that if you start your investing answering the above questions, you will be on the right track. After the right portfolio and financial tools have been selected it’s necessary to understand different types of returns. Michael and Robert finish the podcast discussing differences between geometric and arithmetic returns.
In this episode of Trend Following Radio:
Warren Buffett trading
Expected average performance
Leveraging a portfolio
Luck vs. Skill
“Most people probably spend much less time thinking about their portfolio’s than they do thinking about getting their car fixed.” – Robert Carver
The turn of the year is when traditional long only money managers state their predictions for the year ahead. Equity managers may be bullish if stocks are cheap or central bankers are expected to flood the markets with money, for example. Or they may be bearish if value is perceived the other way. It may not be an easy task, but the manager can generally make a guess based on a reasonably sound and intuitive argument. For a trend follower, however, it really is hard to answer the question in a manner that would satisfy most people.
The reason for this originates in how trend followers trade. The schematic below illustrates how trend followers are typically long when a market is rising and typically short when a market is falling. This is achieved through a systematic, non-discretionary process where computer algorithms analyse historic data in order to identify trends lasting anything from a few days to multiple months, with an average of around two months. Of course, individual markets may not trend all the time, so trend followers diversify by trading a wide variety of markets over many asset classes. The intention is that, as long as these markets are lowly correlated, the trend-following net is cast as wide as possible, and trends are captured wherever and whenever they occur. The technique is applied to the most liquid instruments available, meaning the strategy itself is highly liquid.
On today’s episode of Trend Following Radio Michael Covel starts off with a short clip from Star Wars. Michael notes that Yoda and the force have unexpected connections with trend following. He then recounts a story that happened to him a few weeks ago where he feels “the force” was involved. While he was waiting to take a red eye to Tokyo with his parents a man asked if he could share the power outlet he was using. That man happened to be one of the world’s most famous computing pioneers. Michael agreed to share the outlet if he could take a selfie with him. It was a weird serendipitous moment that Michael attached “the force.”
Michael goes on to read from an article titled, “Meet David Harding: The Man Behind Models that Beat the Market,” published in The Australian Financial Review. The article highlights Harding’s accomplishments and views on trading. Harding stresses in the article that the only reason systematic trading has gotten big over the years is because it works. Harding’s company, Winton Capital Management, goes completely against the efficient market hypothesis and he has actually made massive money going against the theory. David goes on to say that investment management is an internal psychological war with yourself. You constantly doubt yourself but the challenge is rising above that self doubt and sticking with your system. If you allow every emotion to be built into your system then you do not have a system at all.
“Over-fitting and It’s Impact on the Investor” by the Man AHL Academic Advisory Board is Michael’s next interest. Over-fitting is finding patterns that aren’t actually there. It is a common phenomenon in science as well as trading and other fields of study. Analyzing a companies culture is a good way to produce less over-fitting results. Michael quotes different view points regarding the concept of over-fitting, finishing up with inspirational quotes by NBA player Kevin Garnett and Christopher Hitchens focused on “making it happen.”
Michael Covel speaks with Martin Lueck on today’s podcast. Lueck holds an M.A. in Physics from Oxford University and currently is the Research Director and President of Aspect Capital. Lueck was originally with Adam, Harding and Lueck Limited (AHL), which he co-founded with Michael Adam and David Harding. At AHL, Martin initially focused on trading system research before taking on responsibility for the further development of the proprietary software language which provided the platform for all of AHL’s product engineering and implementation. Covel and Lueck discuss when he first saw quantitative, systematic styles in action; the beginnings of AHL; early coding experiences; early decisions that lead to a completely systematic strategy; diversification; what percentage of the educated financial audience grasps the strategies that are used at Aspect; behavioral economics; and bringing new potential opportunities into Aspect.
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All these years later, all these stories later, and CNBC still has a difficult time explaining trend following to the masses. One good excerpt:
Funds managed by ISAM, Cantab, AHL, Systematica and others produced double-digit gains over the first three months of 2015, according to private performance figures obtained by CNBC. “Trend followers and other macro investors clearly outperformed,” said Robert Christian, head of research at K2 Advisors and Franklin Templeton Solutions. “What’s carried people is just classic, good old trend following.”
Note: ISAM is Larry Hite’s shop. One of my favorite no-nonsense trend following pros.