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16 Jan 2017 (AFR) – Quant fund Dalton Street and its secret black box

[COMMENT: Here are some interesting insights into the makings of a special fund manager.]

(16 January 2017, AFR, p13, by: Jonathan Shapiro, Philip Baker)

I’ll bring out my black box, if you show me your crystal ball.”  That is the challenge laid down by Alan Sheen to the “fundamental” stockpickers who scoff – and there have been many – at his highly successful quantitative trading strategy. In the age-old conflict between the systematic traders who use models to invest and the fundamental investors who investigate companies to work out their value, it’s clear where Sheen and Nick Selvaratnam of Dalton Street’s allegiances lie. ‘ <snipped…>

‘After two years, and after meeting countless CEOs who would describe how wonderful their company was and why it would outperform all its competitors, only to under-perform, he cracked.”I thought this is absolutely ridiculous. I cannot believe people invest this way.” Back when he was studying mathematics he had started exploring the newly created VIX index and whether volatility and liquidity was a better short-term predictor of markets than price-earnings ratios.’ <snipped…>

‘”We cannot get around our own unconscious biases. In Australia – and Asia for that matter – the first thing we hear in the morning is about US markets. Whether you hear it on the radio, from Kochie on breakfast TV, or in a morning meeting it’s the first thing we hear. So we anchor on that. The next thing we anchor on is what the market did the day before.” His trading system that took signals from the US close to trade various Asian markets including Australia seemed to work.’ <snipped…>

‘So he and his friend traded single contracts and after winning nine days out of ten, the idea didn’t seem so stupid. Six years later they were trading $100 million of the family office money that way. ‘

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Brainy's Share Market Toolbox. Read the honest truth about the sharemarket. Develop or fine tune your investing/trading strategies using share price charts (technical analysis), or learn about the investment strategies of others. Melbourne (Australia) based - supporting share market investors and traders to build wealth through smarter investing using my Share Market Toolbox arsenal of weapons to tackle the market.


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