Financial regulators around the world routinely emphasise the need to invest with medium to long-term horizons and the asset management industry has often been criticised for focusing on the short-term. A London-based hedge fund turns this conventional wisdom on its head, indicating that a strategy to focus on the extreme short term has worked very well for its investors. The Runestone Capital Fund generated a return of 30% over 2016 by only looking one day ahead, its portfolio manager told Bloomberg. This trading strategy is aimed at stripping out the human biases that influence asset prices. Sounds appealing. Do your trades, go to bed, get up the next morning and see what the day holds. Live for today. While some might consider this reckless, the approach surely can’t be more risky than staring into a crystal ball, armed with economic forecasts and other predictions, to rebalance a portfolio? A long-term approach might help investors ride out the volatility and will help ensure a return that is in line with market averages but it won’t turbo-charge your portfolio compared to other approaches. The Runestone Capital Fund gives new meaning to “active” fund management. Can it get more active than trading with a one-day horizon? This approach is probably not for anyone with a dicky heart. – Jackie Cameron
By Jonas Cho Walsgard
Bloomberg – This hedge fund is only looking one day ahead.
That delivered a 30 percent return in 2016 for the London-based Runestone Capital Fund, which crunched more than 700 variables to develop a quantitative model for trading U.S. equity index volatility.
“We trade with a one-day horizon as predicting volatility long term is completely random,” Rune Madsen, founder and portfolio manager of the $17 million fund, said in an interview on Monday.
The absolute return fund, which targets an average annual return of more than 20 percent, is always directional, making bets that one-day volatility will either rise or fall, according to Madsen. The return for 2016 was 30 percent with a maximum loss from peak to trough of 5.2 percent.
As stock markets have steadily rallied, the Chicago Board Options Exchange Volatility Index has dropped. The VIX traded at 12 points on Tuesday compared with an average of 15.5 over the past five years. While low volatility has limited returns for the fund to 1.4 percent for the first two months of 2017, a higher expected average return when volatility increases makes it a useful hedge when markets drop.
“You put on an asset class with a different type of risk so there will be a strong diversifying effect in the portfolio,” he said. “Profit and loss movements don’t have any impact on inherent value.”
Madsen, 42, and Rasmus Andersen, 35, who worked together at Morgan Stanley, started the fund in 2015 and base investments strictly on statistical probabilities to “remove human behaviour biases.”
One investor and adviser is Peter Clarke, the former chief executive officer of Man Group.
“It’s a perpetual way of investing,” he said. “There are always movements in volatility so there are always opportunities.”