Jason Gerlach and Chris Stanton are the CEO and CIO of Sunrise Capital Partners. Sunrise Capital is a systematic firm located in San Diego. They were featured in The Little Book of Trading. Sunrise has been in business for four decades trading. Their goal is to invest in an intellectual way by taking human emotion out of their decision-making.
Michael opens the conversation up with Brexit and how Sunrise Capital reacted. There are foreseeable events and unforeseeable events. Brexit was a foreseeable event. Jason and Chris breakdown the weeks before Brexit, and how Sunrise has been positioning their portfolios in contrast to other firms. Jason and Chris say that in the systematic world there have been two different camps of thought in how to approach Brexit.
Michael moves the conversation from Brexit to Oil dropping in 2014. Jason and Chris say that these events are not just moneymaking events, they are also risk management events. People live in the middle of a bell curve and never think of the tail events in life. They trade and invest for the non-random times and are always shocked when events tend to go further than expected. Sunrise does the opposite and uses technology to curb our human irrationality.
Michael and Chris dive deeper into risk management and the importance of diversification. Sunrise has five systems that operate differently in all market situations. Chris explains risk adjusted return and how setting the “heat” is really the heart of leverage. “What kind of return is optimal for you?” The higher expected rate of return, the more drawdown you may have. When you look at someone’s rate of return, you have to look at what their drawdowns are like. Leverage is a reality in strategies; you just need to be responsible with that leverage and cater it to each individual investors needs.
Michael moves on to ask, “Has Brexit opened up Pandora’s box?” Chris and Jason say Sunrise believes that price distribution has changed since 2013. Intraday volatility has changed and prices now make huge jumps in smaller time-frames than they ever have before.
In this episode of Trend Following Radio:
Brexit and systematic trading
Directional betting on a coin flip event
Preparing for black swan events
Are computers good or bad?
“Systems control the trading ideas. What they do is they give you a statistical edge in creating your trading ideas.” – Chris Stanton
“It’s a bad idea to get the insurance after the catastrophe.” – Jason Gerlach
Michael Covel talks with Jason Gerlach, CEO of Sunrise Capital Partners (sunrisecapital.com). Sunrise was originally featured in Covel’s “The Little Book of Trading”. This is conversation is mentality behind the nuts and bolts: systems, trends, models, etc. Covel and Gerlach take a fascinating look at some of the details of systematic trading. Gerlach and Covel discuss why if everything in your portfolio is working at the same time, your portfolio isn’t well-diversified; why the masses think that equities going straight up means “no risk”; thinking about the downside; the importance of “systematic” as an idea and trading strategy and the desire to take out unwanted factors such as panic, fear, and greed from trading; counterarguments to people who call systematic strategies a “black box”; why the news generally ignores systematic trading strategies, and why Nassim Taleb’s “The Black Swan” might be making systematic trend strategies a little “sexier” to mainstream media outlets; the word “asymmetric” and why it’s so important to Sunrise and their Asymmetric US Equities program; US Federal Reserve intervention in markets, and if it’s changed Sunrise’s strategies; why markets are inefficient and exhibit price trends, countered against Eugene Fama’s Nobel Prize-winning theories; and why Sunrise generally doesn’t “add in” fundamentals to the systematic equation.
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Trend following is no more dead than the sport of sailing or the act of kite flying would be considered dead if for a period of time the wind didn’t blow. Like a sailboat or a kite, a trend following trading model is designed to capture the power of environmental forces. When the requisite environmental forces don’t occur for stretches of time, activities that depend on those environmental forces are not going to be successful. But if the wind stopped blowing for a month, would that mean that that the concept of sailing or kite flying no longer makes sense? Of course not. The physics of both activities would still make perfect sense and once the wind starts blowing once again, sailboats will again sail and kites will again fly. The same holds true for trend following. Just as the wind will always return to blow in the future, the forces that drive price trends—greed, fear, euphoria, panic—will return at some point and when they do, trend following trading models will make a great deal of money.
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