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
I wonder how many fundamental analysts could have “predicted” the market’s reaction to the Brexit news. It amazes me how many people still believe these “experts” on TV know what they are talking about. Hopefully some day people will learn that trend following is the only way to prepare for these 100-year floods that seem to happen quite often. Thank you for your podcasts and continuing to educate those who are looking for the right way to trade.
At a philosophical level, it is important to understand that while Brexit is in some respects novel and shocking (no country has ever left the European Union and many polls suggested that Britain would stay), from a broader perspective, Brexit is no different than any of the many exogenous geopolitical events that have periodically disrupted markets over the course of our 37 year investment history. As we see it, Brexit is simply another example of an “unexpected” event happening and investors overreacting to that event in such a way that it causes a great deal of immediate market turmoil.
The financial pain caused by this turmoil is real, it is not enjoyable and it is generally not good for the global financial system or people’s faith in that system, particularly in the short term. However over the long haul, as history has proven over and over again through world wars, revolutions, and numerous other types of global disruptions, markets are resilient and ultimately right themselves to some kind of equilibrium level. Accordingly, our approach to Brexit has been quite similar to the approach we’ve taken to numerous other global shocks and that is to plan, prepare and then “keep calm and carry on” as the British would say.
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.
In putting together my book The Little Book of Trading I had the opportunity to talk with most of the office at Sunrise Capital. Marty Klitzner was one of the first people I met with there. He was President of Sunrise. From my perspective one of his roles was clearly as gatekeeper and I later learned that he was a good deal of the business success behind the firm. Unfortunately, Marty passed away on April 14, 2012 in Del Mar, CA.
I remain always thankful that men such as Marty, men with decades of trend following experience, would give me their time and knowledge.
Gary Davis was just about to turn 34 as he started trading with a trend following program he had learned from author J. Welles Wilder, Jr. He lost on his first 17 trades, but once he made one tweak, which he believed is the only reason he is still trading now, he was back in the game.
Davis [then] came to the conclusion, after a period of rigorous and profitable testing with his own money, that there was significant potential in scaling the size of his trading strategies. He sought the help of friends and family for capital to seed a larger pool of money.
Davis founded and launched what would come to be known as Sunrise Capital Partners (known as Sunrise Commodities at the time of inception) in 1980—with the gentle prodding of Ken Tropin (who then was with Dean Witter brokerage, but who today runs one of the most successful trend following firms in the world).
Davis was not super high tech at the time. He preferred handwritten charts and price quotes from the print version of the Wall Street Journal. That should be an inspiration for those of you who want to make excuses for not having the perfect this or that. Just do it, right?