Old Park Capital : SI8

Summary

SI8 is founded on the axiom that the markets display a large degree of randomness and are fundamentally inefficient. At the core, this strategy is based on the hypothesis that while markets can display directional biases some of the time, their price actions are essentially random. Despite these erratic price movements, there is one constant: markets continuously expand and contract in terms of volatility. This strategy generates profits by anticipating these expansions and contractions. From an operational perspective, no more than two trades per day are ever executed in each market and no overnight positions are held. These features ensure liquidity and minimize risks against periodic market shocks and systemic risks.

Investment Strategy

SI8 is divided into 2 stages: pre-market and post market-open stages. At the pre-market stage, we quantitatively analyze the markets through 5 filters, namely, volatility, prevailing bias/trend, support and resistance areas, time factors and strategy behavioural analysis. This analysis generates the parameters to be deployed in each market the following day. From the parameters, over 20 different scenarios can emerge and hence the mere fact of a buy signal, for instance, being generated does not mean it will be taken. At the core, SI8 attempts to predict whether the following day will be an expansionary day or contractionary day. In the case of the former, the model is allowed more latitude in terms of exits while in the case of the latter it will seek to exit at dynamically generated levels for profit taking and stops. The exit mechanism is a key differentiating factor of our model. In short, the model plays defensively when a contractionary day is expected and when an expansionary day is expected, it trades aggressively. Between 70 to 75% of time, the model is set for a contractionary day and 25 to 30% of time, for an expansionary day but the latter accounts for 60% or more of profits on average.

Risk Management

The SI8 investment strategy invests only in highly liquid exchange traded derivatives (futures only). SI8 applies fixed price stops in every market so that the maximum aggregate loss on any given day is set at a maximum of 2.5% of the total portfolio NAV. In reality, however, this 2.5% daily limit is never reached as the model’s parameters prevent it from trading all the market in a single day and therefore the actual risk exposure is noticeably less than 2.5%. In addition to the maximum loss set via fixed price stops, SI8 may also exit positions through dynamically generated soft stops in response to price actions, thus further limiting potential losses on any given day. The largest daily loss experienced to date is -1.13%. Furthermore, the model also has a time stop as the third layer of an exit point. The average holding period of our positions is less than 3 hours with no overnight positions.