Season Investments

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Micro Update: Antifragile Investments

Posted on April 20, 2012

361 MANAGED FUTURES STRATEGY FUND 

Nassim Taleb, author of the now infamous book The Black Swan, is working on a new book entitled Antifragile: Things That Gain From Disorder. Taleb points out that there is actually no word in any language for the opposite of fragile, which is why he has coined the word “antifragile.” Simply put, Taleb defines antifragility as something that thrives from random and unexpected shocks - it is something that is more than just robust or resilient to volatility, but instead actually benefits from it. Traditional asset classes typically react negatively to these types of unexpected shocks, which is why a truly antifragile asset would be an extremely valuable addition to a well-diversified portfolio.

At Season Investments we search far and wide for assets that have the potential to exhibit antifragile characteristics. One such investment that we hold in the Absolute Return asset class is the 361 Managed Futures Strategy Fund. The fund is offered by 361 Capital, a firm that has been running alternative investment portfolios for the past two decades and recently started rolling out their strategies in publicly-traded mutual funds. The stated objective of the fund is to “seek positive absolute returns that have a low correlation to the returns of broad stock and bond markets.” This is exactly what we look for in our Absolute Return investments. The fund’s investment strategy is based on a quantitative model which analyzes price and volume trends within the context of historical mean reversion tendencies to assign a probability to the market being up or down the following trading day. The fund will  patiently sit in cash until the probability of an up or down day is high enough to trigger a trade, which may be either long or short.

The fund has done remarkably well amidst the turbulence of the past couple weeks, calling 6 out of 6 trades correctly (4 long & 2 short). This is primarily due to the fact that the strategy thrives on volatility which creates short periods of time when the market is either oversold or overbought. A trading program can profit from these opportunities by taking a contrarian bet that the oversold or overbought condition will reverse and the price of the market will “return to the mean”. The faster and further the market moves in a single direction, either up or down, the more likely a mean reversion trade is to be profitable, which is why the 361 Managed Futures Strategy Fund could be considered somewhat antifragile.

Although this fund is brand new, the underlying strategy has a verifiable history (e.g. trade signals were submitted in real time to an independent third party auditor) going back to September of 2008. The table below is a summary of the results from 9/30/2008 through yesterday’s close. chart.png

They key takeaway is that the 361 Systemic Index produced higher returns with less risk over this time period while only being invested in the market 20% of the time. More importantly, because of its ability to go long or short as well as to be in cash, the strategy produced these results with only a 26% correlation of monthly returns to the underlying equity index. Low correlation between asset classes and individual holdings is the key ingredient to building a Diversification 2.0 portfolio. The strategy isn’t perfect and still experienced a steep drawdown in late 2008, revealing that the primary weakness of a strategy like this is the potential for being too early on a contrarian trade. That said, the strategy recovered from its drawdown in a much shorter period of time than the index.

Overall, the 361 Managed Futures Strategy Fund fits the profile of what we are looking for in a core Absolute Return holding.

Season Investments, LLC
info@seasoninvestments.com
(p) 719.528.8400
(f) 719.352.3617

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We want Transparency to be one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. Regular Macro Updates will address our economic and capital market viewpoints and discuss top-down portfolio positioning. Also watch for Micro Updates which convey our reasoning behind specific investments. Lastly, we do a series of Q&A posts based off questions we receive which can benefit our broad investment community.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.