Short Term strategies

Liquid Transparent Alpha

Where do you see stocks headed one year from now? These days there’s not a lot of optimism going around. Most people would prefer not to be in stocks at all if possible. But if not stocks then where do you put capital?

We as a firm are remaining optimistic in spite of all the turmoil. Currently we are increasing our interest in short-term trading platforms and are seeking out successful short-term traders that perform well regardless of volatility. The reasons for this are compelling.

Short-term traders are a very specific class of investment strategy that exploits market anomalies and inefficiencies which occur within short time intervals. They occur for various reasons, most of which relate to supply and demand factors, market sentiment, and behavioral finance.

This type of trading is non-directional, uncorrelated to equities, bonds, commodities, or hedge fund patterns, and has attractive risk-adjusted returns. Short term trading programs benefit from low volatility in terms of track record because of consistent generation of small profits. Volatility in the markets is generally a benefit to this type of program.

Methodologies found in short-term trading programs include pattern recognition, short-term momentum, mean revision, and fundamental and statistical arbitrage. The trend towards electronic trading facilitates the functioning of such trading styles.

For example, the newest program we are monitoring uses a statistical arbitrage, high-frequency, algorithmic trading system with a mean reversion component. They trade only highly liquid, electronically traded instruments and are performing positively in the current environment. In fact, the turmoil is just another fuel for their fire.

Particularly in a time like we’re in now, having a portion of assets allocated to a program with little or no correlation to traditional investment products like stocks and bonds is a safety-net as well as an opportunity to generate returns when there is otherwise no apparent opportunity. On a more general basis, having an uncorrelated short-term program included can help boost the returns of any type of portfolio because of the low variance in rate of return.