Counter Trend Trading

October 25, 2012

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In this issue we include research from 361 Capital (hat tip to Josh at The Reformed Broker for finding this).  A summary from the conclusion of their Counter Trend paper below:

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“The counter intuition and relative obscurity of countertrend models have made them less widely used than trend following models in the managed futures space. However, the counter intuitive nature of these models seems to be the key to consistently making short term profitable trades.

If you are always buying when everyone else is buying and selling when everyone is selling, you do not have an edge in the markets. To get an edge you have to invert your instincts and trade against “the herd.” Systematic counter-trend models provide an objective, mechanical approach for doing this. These models thrive on market noise which has been steadily rising over the last 40 years and will likely remain at elevated levels for years to come. They are characterized by many short duration trades that are correct 55% to 60% of the time. Each trade does not extract a lot of profit out of the market, but when applied consistently, the small edge of counter-trend trading adds up. The simple counter trend model explored in this paper showed an average annual return of 10.15% over five of the world’s largest equity markets for the past 15 years. Furthermore, because of their short duration trades, counter-trend systems tend to have low correlations to other managed futures strategies as well as traditional asset classes. Nevertheless, every investing model is susceptible to going in and out of favor as the structure of markets change over time. The best countertrend models will have explicit, systematic mechanisms for recognizing these shifts and adapting along with the market.”

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Here are their white papers:

and some highlights of their recent briefings:

For more information:

4600 S Syracuse St Suite 500Denver, CO 80237866-361-1720[email protected]About 361 Capital

Our firm philosophy begins with our belief that alternative investments should have a place in most investment portfolios. Alternative investments can add significant value to a portfolio particularly in volatile markets. Today, institutions are widely using alternatives in their portfolios, with allocations in excess of 50 percent in some cases.* Going forward, our belief is that alternatives will play a greater role in all investment portfolios as investors and their advisors become more educated on how to best use them and understand the power of uncorrelated investment returns.

361 Capital’s mission is to create alternative investment vehicles that provide weekly liquidity or better and educate our clients how to best use them in portfolios.  Liquidity is of paramount importance in today’s world of alternative investing. That is why we manage mutual funds and separately managed accounts (SMAs) that provide daily liquidity. In addition, our hedge funds provide weekly liquidity, with limited restrictions.

361 Capital believes that a successful investment process is one that is disciplined and repeatable over a long period of time. This is best accomplished by combining bright minds with the power of technology and quantitative analysis. The typical investment process includes sourcing investment ideas, analyzing the results, constructing a portfolio, and then providing ongoing monitoring and portfolio maintenance. These are all important steps but commonplace and not differentiating. We have learned this though interviewing hedge fund managers over many years looking for those that have a unique edge.

The unique edge of our investment process begins with the proprietary quantitative algorithms we have built that support all of our investment analysis. It makes sense that technology used appropriately can identify anomalies that can be exploited in the creating and managing of investment portfolios. Lastly, we use our risk models to discover the best fit for investments within a portfolio that provide the desired risk/return outcome. Portfolios with overlap can create an unexpected and unfavorable outcome.