MSR Investments, LLC : MSR Quantitative Directional Strategy

Summary

MSR Investments, LLC takes a unique approach to short term directional trading. MSR’s Quantitative Directional Program evaluates multiple return distributions over a variety of time frames. Based on given forecasts of probability-based forward return distributions, the Program determines whether a certain market is most likely to be in reversal or momentum mode and then trades it accordingly. The time horizon for this assessment can range from one week to one month, although actual trading positions may be shorter in duration. Additionally, the Program incorporates an intraday “break-out” trading model that attempts to mitigate losses when there are large intraday price changes. The Program trades a wide variety of futures markets including global equity indices, currencies, fixed income, energy and gold.

Investment Strategy

The portfolio is constructed from a collection of hundreds of individual "strategies". We define a "strategy" as a combination of one model, one market, and one set of variables. Strategies are reweighted in the portfolio daily based on a probability algorithm designed to predict relative future performance. Retaining hundreds of "strategies" in the portfolio is intended to mitigate the negative effects of data mining that can result from choosing only the “strategy” with the best return. The individual strategies are divided into two categories: "reversal" and "momentum". We employ a probability based analysis focused on the return distribution of the various markets we trade across certain time frames that our research indicates are critical to determining the current state of the market. This analysis determines whether a certain market is most likely to be in "reversal" or "momentum" mode, and we then trade it accordingly.

Risk Management

Position sizes are detemined by the historical volatility of both the contract being traded and the strategy being employed. Daily VAR limits are also employed. Finally, the daily breakout strategy is designed to limit downside risk on the most volatile of days.