W.G. Wealth Guardian Ltd. : SAFI2 Program (SAFI2)

Summary

The Strategic Automated Financial Investing2 (SAFI2) Program is a systematic directional long/short global macro strategy that invests in a diversified portfolio of currencies, bonds, equities and commodities futures around the world. The Program uses a quantitative approach to capture medium term investment returns for the major asset classes. The Program seeks to provide net annual returns superior to traditional investments and attempts to minimise monthly drawdowns in net asset value to a minimum. SAFI2 returns have low correlation with the major asset classes and many alternative investment strategies. The SAFI2 program was designed with the central principles of capital preservation and enhanced risk-adjusted returns in mind. The aim was to develop an agile and robust trading program that would provide steady and consistent returns rather than having stellar months or years that are accompanied by large negative swings and drawdowns. The Sharpe ratio remains one of the most important performance metrics monitored by management. With the low margin utilisation and balanced portfolio approach, the program attempts to assimilate the risk-return profile of a traditional investment portfolio whilst being totally uncorrelated to such portfolios. This goal has been achieved by leveraging the expertise and knowledge of the experience gained by the developers though years of trading and market observation.

Investment Strategy

The SAFI2 trading program is based on both statistical and technical analysis as well as pattern recognition models. The philosophy believes that trends and patterns continue to occur and repeat in today’s marketplace and therefore producing profitable opportunities. However the increased micro-volatility and long periods of range-bound trading renders traditional trend-following approaches largely ineffective. The program was developed to improve on this.The program evolves the principles of tradition trend-following/break-out type models by employing advanced pattern recognition models and statistical projections to add multiple countertrend elements. The program also excels in identifying trending periods and will only allow investment during this time. This results in a cohesive trading strategy that is both nimble and adaptive which is suited to a wide range of market conditions. The following are the key attributes of the strategy: 1) Multi-faceted, adaptive approach; 2) Multi-timeframe methodology incorporating trend and countertrend elements; 3) Low margin utilisation and risk averse attitude; 4) Conceived by investment professionals with over 50 years’ combined trading experience; 5) Designed from inception with these key characteristics in mind; 6) Developed using observable market behaviour and statistics; 7) Track record since September 1997.

Risk Management

The risk management of the program is inherent to the design ethos of the program. The overall program averages 9% margin-equity, with an overall limit of 20% margin-equity. Although entry points are an important part of any trade, the exit methodology can often be neglected or often relies on stop-type exits to terminate positions. The current methodology for exiting trades should not be seen as a traditional stop-type method. Rather it is an in-built exit strategy that is integrated into the entire system. It is not an after-thought that was added to the system after the trade entry mechanism had been developed. The program is founded on the belief that only by focusing on the exit strategy and managing open positions can the desired risk profile be realised. It should be noted that the core trend-identification model that is used to initiate trades has also been designed to detect non-trending periods or deterioration in trends. This, in the first instance, triggers potential trade exits. Similar to trade initiation, an adaptive strategy is also employed to aid with timing/level of these exits. There are no fixed stop levels that are calculated using the traditional technical indicator groups such as moving average cross-over/gann levels/support and resistance levels. The exit points are determined using a combination of volatility and momentum indicators as well as time factors which constantly adjust to current market conditions. This method works best to both capture potential persistence in trends and trend changes that occur in different market environments. The program also has an embedded portfolio limit threshold that once triggered will initiate liquidation of the entire portfolio. This only occurs rarely and under extreme market conditions. The mechanism takes into account both individual and collective market volatility and correlation risks and when an extraordinary level is detected all open positions are closed out. This automated process also determines when the portfolio can then be reinstated once the volatility and concentration risks subside.