Below is an excerpt from a recent interview with Sagat Capital. You can read it in its entirety at their CTA profile by clicking the Due Diligence link in the sidebar and completing the download request form.
Market Philosophy and Trading Method
IASG: What is your core belief about the markets? What have you learned about the markets that led you to your current trading approach? Your trading philosophy, if you wish.
SAGAT Capital’s methodology has been developed by its traders on the basis of over 25 years of institutional global macro/RV trading experience in commodities, fixed income and foreign exchange.
Rodney Ngone, Chief Investment Officer, has developed the algorithms used by SAGAT Capital on the basis of his discretionary trading experience as a global macro and relative value trader. Rodney has worked as a derivatives trader on both the buy and sell side in institutions such as RBS Financial Markets and Bank of New York Mellon and macro hedge funds including AVM (III) in Florida and Fortress in New York. Together with Chris Tyrer, a commodities trader who used to head Barclays Capital’s Global Crude Oil team, he was able to deploy the algorithms to commodities (in addition to FX, equities and rates). Through his years of trading, Rodney was able to distill a certain number of price indicators which he saw to have forecasting power. His belief is that in both high and low volatility environments, a trader should be able to extract value by looking at the rate of change in price and that, irrespective of the volatility conditions, all markets exhibit predictable momentum (whether in first, second or higher orders). Momentum is not a short-lived phenomenon, and has continued to perform when traditional trend analysis has floundered.
IASG: How does your system or trading method work and WHY? What is the theory behind it? We don’t need the secrets, just the core principles.
Our trading ethos is centered on Evolved Momentum Persistence that exploits trends and price reversals in the world’s futures and forex markets.
We operate a short-term system that fuses global macro/RV methods with systematic futures trading. We utilize a form of momentum analysis which differs highly to traditional trend analysis.
In building the algorithms, Rodney wanted to emulate how a global macro trader would operate within any particular market. We recognize that trend following and mean reversion are the two main techniques that a directional trader would employ. However, a discretionary trader would employ them at will depending upon the price environment that is prevalent within the chosen market.
The aim of the algorithms is to emulate this mode of action within a particular market: they will operate as trend followers when necessary and mean reversion players when the price environment requires. The process has been systematized and aims to capture a mathematical edge that these algorithms have identified over time.
With this in mind, we approach the construction of our models very differently to a traditional CTA. A typical CTA will take a data set and use various data mining techniques to extract statistically significant patterns. We, on the other hand, already know what patterns we look to extract from a data set. The resulting models are therefore very intuitive to the traders in the team, who fully understand the way the models operate.
In building our models, we utilise evolutionary learning techniques which are based around genetic programming. This allows for much more efficient production of models as they are deployed into different markets/sectors.
Read the rest by requesting the Due Diligence document for Sagat Capital