So Predictable...

Discussions about Money Management and Risk Control.
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DPH
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So Predictable...

Post by DPH » Fri Aug 12, 2011 3:16 pm

I guess I’ll start out admitting to my own maximum drawdown which occurred not too long ago. I do not want to jinx my karma!

With that being said, I want to comment on something that I predicted for a long time. That is the implosion of Dighton Capital.

Dighton is (was) a CTA who had something like 100 million dollars under management.

His style was an in-your-face counter trend trader. This guy had balls, as he would stand directly in front of a speeding freight train predicting where it was going to stop and turn around.

The ironic thing is that he was often right! He would take large positions in extreme moves counter to the underlying trend. If he started out wrong, he would often add to his losing position!

The guy did everything investors have ever been told NOT TO DO as a trend follower.

Because of his success, he attracted much investor capital.

Well………………………… Anyone want to take a stab at what happened to him?

Yes, his time came. Apparently he was heavily short the Swiss Franc in the recent rally. Not only that, apparently he added to his position, while it was going against him! His drawdown now stands at roughly 76%!

In hindsight, we would all argue this was an accident waiting to happen, but I lost many prospective investors to him.

I would argue, often to no avail, that this was what was coming someday, but many simply did not want to listen. He was able to enamor them with his recent winning track record.

I’ll be the first to say that what he did was impressive while it was working. He took some brave positions, and it worked for him (for awhile), but is it just me, or was it not clear what was coming?

I’ve seen this same thing with investors who bought into index option writing programs that imploded. Recent winning track records lured them in, and they failed to look at how much risk there was.

I guess what I am saying is that track records are just a tool. They ARE NOT indicative of what is going to happen. Yes, seeing winning years is reassuring, but make sure the approach makes sense too!

A BAD approach can be a wolf in sheep’s clothing. It can look safe and secure on the outside (winning track record) but doom itself to fail eventually with inadequate risk control.

Investors have to use common sense ALONG WITH track records. Track records alone do not tell the whole story.

AFJ Garner
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Post by AFJ Garner » Fri Aug 12, 2011 4:31 pm

Interesting. I had a conference call some time ago with these guys who were interested in investing with us for their fund of CTAs fund. Their idea was timing of investments and they warned that they would be playing the equity curve - getting in and out of our product as they perceived peaks and valleys in our performance.

Not the ideal investor perhaps and in any event nothing came of it.

LeviF
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Post by LeviF » Fri Aug 12, 2011 10:45 pm


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