Asymmetric Investment Returns - Insights into portfolio management beliefs, strategies, and tactics that aim to create a positive imbalance between risk and reward

With one of the strongest and longest running actual track records applying systems that pursue asymmetric returns, we have had a lot of interest from independent wealth managers. We have made our programs available on the institutional platforms used by wealth managers and are in the process of hiring advisers across the country that will work with wealth managers. 

We are pleased to announce that our Asymmetry™ managed accounts are now available to wealth managers who are independent registered investment advisors and custody accounts with:

• Schwab Institutional + Schwab Advisor Services™
• Fidelity Institutional Wealth Services®
• TD Ameritrade Institutional
• Pershing Advisor Solutions®

The Asymmetry Investment Program™ global tactical rotation and systematic trend following models are offered at different objectives and risk levels. 

Asymmetry™ R15

Asymmetry™ Global Tactical Rotation GTR 10

Asymmetry™ U.S. Sector Rotation 

Asymmetry™ U.S. Equity Trend Following

Asymmetry™ International Country Tactical ETF 

Asymmetry™ Global Trend Following

All agreements and compensation arrangements are negotiated entirely between the wealth management firm and Shell Capital Management, LLC.

For more details about the Asymmetry Investment Program™ managed accounts contact us. 

According to Pensions & Investments, known as the international newspaper of money management, Shell Capital Management, LLC is a “Top Performing Manager” in the World Allocation category with my Asymmetry™ R15 portfolio over the past five years. Asymmetry™ R15 achieved the fourth highest five-year annualized return amoung U.S. managers in the "World Allocation" category according to their managed accounts database.  

Asymmetry™ R15 is my longest running portfolio in the Asymmetry Investment Program™ with an inception of April 2005. This recognition is especially meaningful because it covers a very challenging full market cycle. Consider that a five-year return ending December 2011 began December 2006. This period included the worst market conditions since the Great Depression.

Asymmetry™ R15 is a global tactical asset allocation that rotates between world markets via liquid exchange traded securities. It's offered as a separate managed account program. Accounts are owned and titled in the clients own name at an independent custodian.

The real “Congratulations!” goes to our clients. Those who have invested with us over the years and trusted us early on, when there wasn’t a top ranked track record. I chose early on to be a smaller boutique offering our program to a smaller group of people who really ‘get’ what we do. They joined us based on the process and system. We now have historical data supporting the expectation of the process and the ability to actually operate it. The people whose accounts are in that composite are the real winners. They have my full commitment to keep pressing forward and doing what we know to do. 

See: Top-Performing Managers of Composite World Allocation, 4th Quarter 2011 BY PENSIONS & INVESTMENTS. PUBLISHED: FEBRUARY 20, 2012 

For information about the Asymmetry Investment Program™ and Asymmetry™ R15, please contact us.

Past performance is no guarantee of future results. 

Stephen Taub writes that "High Net Worth Individuals Pulling Out Of Hedge Funds" in Institutional Investor Magazine, but that Hedge funds have surpassed the magic $2 trillion mark.

The inflows of capital into hedge funds are coming from institutions, not high net worth investors, according to the Capgemini and Merrill Lynch Global Wealth Management 2011 World Wealth Report referenced by the article.

He says:

And in March, Preqin reported a 50 percent rise in public pension plans investing in hedge funds.

But then:

Investors are apparently still spooked from the days of the financial meltdown, when many of their funds of funds investments performed poorly. And many hedge funds gated their assets, preventing them from redeeming.

High net worth individuals are looking for liquidity, confirms William Sullivan, Global Head of Market Intelligence, Capgemini Financial Services. “Their top priority is preserving capital."

1. They defined High Net Worth Individuals as those having investment assets of $1 million or more (excluding primary residence, collectibles, consumables, and consumer durables). In my opinion, that seems low. While $1 million in investment money is a good amount of money, I'm not so sure that would be the minimum for "High Net Worth". I know a lot of people with $1 million invested and most of them don't think of themselves as ""High Net Worth" at that level.

2. What they are doing with their money isn't something you would want to necessarily follow, as they are not necessarily any better informed. It depends on their money manager and advisers. We could examine their performance history to see how informed they are – if they have an advantage. 

3. I’m not sure hedge funds are necessarily a separate asset class. Instead, hedge funds are the structure many portfolio managers choose to offer certain strategies. Those strategies may be a separate asset class. People often consider markets different asset categories (asset classes), but different strategies (or systems) are too. Consider a counter-trend system that buys very oversold markets and sells very overbought markets vs. a Trend following system that buys rising markets and sells falling markets, for example. Those two strategies have very unique risk/return profiles. I operate several different systems across different markets and each of them are non-correlated, meaning their risk and return profile is very independent of the others. Now, today there are some managers claiming their method is "non-correlated" but when you look at their actual performance history it tracks closely to a market index. If it does, it's correlated. It's certainly not a "separate asset class" (category).

4. Finally, I want to define "alternatives". Wikipedia defines alternative investments as: An investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity, hedge funds, venture capital, and financial derivatives. Again, a hedge fund is merely the structure by which the portfolio manager offers an investment program. Some portfolio managers, like myself, may also offer an "alternative" strategy in a managed account structure instead. A managed account is an account titled in the clients own name that is managed by the portfolio manager as part of an investment program. The portfolio manager may manage hundreds or thousands of accounts in the same portfolio that way. With a hedge fund, it could be the same strategy or portfolio, but it's offered by Private Placement Memorandum (PPM) as ownership in a pooled fund, which may be a Limited Partnership (LP) or a Limited Liability Company (LLC). It's mainly a difference in structure. But, many investors prefer a managed account because it provides transparency, liquidity, and because it's their own account held at a third party institution like Trust Company of America or Schwab, they ultimately know where their money is. That, I think, is what attracts many High Net Worth investors with $1 million or more. But, that's not to say hedge funds aren't a good structure, too. There are many reasons why a hedge fund could even be the better structure for some people. But, the term "alternative" is really a reference not only to a product or market, but also a strategy. An alternative strategy is one that is an alternative to the conventional or traditional asset management strategies like index tracking active mutual funds or conventional asset allocation that sets an allocation and re-balances. My managed account program, the Asymmetry Investment Program™, is an example. To learn more, click HERE.

The topic of selecting an investment manager is an important one. Many investors, including professional financial planners and advisors admit they have little skill at selecting asset managers. In fact, some admit they do such a poor job at it they don't even try. But if you understand the value in alternative investment strategies from private equity to absolute return focused investment programs, then you need to know what to look for in an investment manager. These alternative investment strategies are most often offered privately in a private hedge fund format and sometimes offered as a separate managed account (SMA). Whether you are a private individual investor, an allocator for a family office or institution, or a portfolio manager, the video below is an outstanding example of how a sophisticated investor analyzes a money manager. It’s an interview with the Chief Investment Officer of a family office. He explains why a family who sold a large business may be interested in alternative investments or alternative investment strategies rather than conventional public investments and investment programs like mutual funds.  His family office has allocated 80% to alternative investment managers (like hedge funds and the Asymmetry Investment Program™). He offers some insight about:

• Why family offices (and other wealthy investors) are attracted to alternative investment strategies commonly offered as a private hedge fund.
• What they specifically look for in selecting a portfolio manager.
• How allocators filter managers post crisis:  What exactly did you do in 2008?
• Are they looking at younger emerging hedge fund/money managers?

Click below to view:

On how they select hedge funds:  (begins around 4:07/9:57)

We are looking for opportunities with managers were we can get comfortable as to their strategy and what will generate returns for them and what the risks might be? We haven’t been very active with emerging or start-up managers. I think a lot of that has to do with where we are in terms of time.

2008 was an awesome and an awful market experience it's helpful to look at managers who actually were in existence during that period of time to gain some understanding of how they manage their portfolios are the most difficult. Someone doesn't have a 08 track record is much harder to get a sense of how they're going to do a difficult markets. 09 was a pretty easy market to make money if you were long.

How are you evaluating the 2008 period what are you looking at specifically, the drawdown?

We obviously start with performance but  I also want to see exposure in the portfolio. How did the manager navigate those markets? Did he keep his portfolio fully invested in a market environment for his strategy was not allowing it to make money was actually causing losses? Did he trim exposure? When did he put exposure back into the market place?  is something that we look at it. It's really it's a number of different factors we try and I can understand how the manager managed during that period of time and try to gain some insight on his style. Conviction doesn't automatically mean that you stay fully invested at all times. Although we certainly saw a number of managers who waited FAR too long to trim their exposure. So,  it's a combination of all those factors we try and consider. But I would say one of the things that are most important to me is trying to follow a managers gross and net exposures during that period trying to understand. That leads to conversations of what the manager was thinking at the time.

He goes on to say: 

I like analogies. And one of the analogies in 2008 brings to me it’s like a sailor setting his course on a sea. He’s got a great sonar system, he’s got great maps and charts and he’s perhaps got a great GPS so he knows exactly where he is. He knows what's ahead of him in the ocean but his heads down and he’s not seeing these awesomely black storm clouds building up on the horizon are about to come over top of him. Some of those managers we did not stay with. Managers who saw that, who changed course, trimmed their exposure, or sailed to safer territory. One, they survived; they truly preserved capital in difficult times and my benchmark for preserving capital is you had less than a double-digit loss in 08, you get to claim you preserved capital. I've heard people who've lost as much is 25% of investor capital argue that they preserved capital… but I don't believe you can claim that. Understanding how a manager managed and was nimble during a period of time it gives me great comfort, a higher level of comfort, on what a manager may do in the next difficult period. So again it's a it's a very qualitative sort of trying to come to an understanding of what happened… and then make our best guess what we anticipate may happen next time.

As a portfolio manager of an alternative investment program I can tell you he's spot on. Those whose jobs are that of the asset allocator, who allocates capital to investment programs, often rely too much on Modern Portfolio Theory statistics and not enough on looking very closely under the hood. As a quantitative trading system developer and operator, we are focusing on far different things and I can tell you: it's the things that matter. It's critical that the investor or allocator take a close look at the downside: how was their drawdown from peak to trough? What were the actual holdings during that time? Like he said: do they stay in the market even when it's not working for them? Or, do they reduce their exposure to the possibility of loss (risk management) by selling positions or dynamic hedging?

I also agree with his comments about experience. After such a radical waterfall occurred in 2008 - 2009, more investors and professionals have now figured out the state of the market. In a secular bear market, such waterfalls occur and it can happen again. After the fact, many investment professionals have scrambled to come up with solutions and naturally they'll be attracted to what actually worked in the past: like some forms of Global Tactical Asset Allocation, Trend Following, and other so-called "alternative" investment strategies like we run. We now have new people interested in active portfolio management that seek an absolute return, rather than a relative return. But like he said: they lack the actual experience. You really don't know how they'll react in the heat of the battle. But you can be assured of this: back-testing a system is one thing, executing is another.

 Eugene Fama and Kenneth French are known for "Efficient Market Hypothesis". Many investment advisors and financial planners who take a passive approach often anchor to the hypothesis that the market reflects information too quickly for them to exploit, so they may as well buy and hold a group of index funds. Supporters of EMH continue to change the definition of what makes a market efficient, making it difficult to falsify. However, since the first EMH study was released nearly forty years ago, new knowledge has falsified the hypothesis that markets efficiently reflect new information (news). There is at least one anomaly they admit is pervasive: Momentum. Momentum can mean many things and certainly is applied in different ways by different investors, but it basically means buying stocks that have recently gone up (over the past 3 - 12 months) and selling (or at least avoiding) those that are going down. That may sound familiar, since it is a strategy used by Shell Capital Management to achieve the results you see in our separate managed account program, the Asymmetry Investment Program. We, of course, agree that momentum is a return anomaly and its robustness is at least one factor in creating the results you see in our Performance Composite. However, it takes more than just a price momentum ranking system to create those kind of results. Absolute returns and an asymmetric risk/reward profile seen in our investment program cannot be achieved by relative price strength or price momentum alone; it requires great skill at portfolio management and that involves an edge in risk control. With that disclaimer out of the way, we share some of the comments from "Dissecting Anomalies" a paper by Fama and French that studies some of the anomalies like Momentum.  

The following quotes are taken from: Fama, Eugene F. and French, Kenneth R., Dissecting Anomalies (June 2007). CRSP Working Paper No. 610.

 From the abstract:

  "...momentum is pervasive".

  Page 1:

 "The premier anomaly is momentum (Jegadeesh and Titman (1993)): stocks with low returns over the last year tend to have low returns for the next few months and stocks with high past returns tend to have high future returns. Like the  patterns in average returns associated with net stock issues, accruals, profitability, and asset growth, return momentum is left unexplained by the three-factor model of Fama and French (1993) as well as by the CAPM."

  “…return momentum is left unexplained by the three-factor model of Fama and French (1993) as well as by the CAPM.”

“We find that, at least in the extremes, net stock issues, accruals, and momentum produce strong abnormal returns for microcaps, small stocks, and big stocks. For net stock issues and accruals, however, there are chinks in the armor.”

"The two clear winners, in terms of strong average regression slopes for all size groups, are net stock issues and momentum."

"We also argue that the observed relations between average returns and the anomaly variables (positive for momentum and profitability, negative for net stock issues, accruals, and asset growth) are at least roughly in line with the valuation equation."

"Which anomalies produce strong average hedge returns for all three (micro, small, and big) size groups? The clear winners in Table II are net stock issues, accruals, and momentum."

"Our momentum results complement those in Hong, Stein, and Lim (2000)."

"Since stock issues, accruals, and momentum produce large average EW and VW abnormal hedge returns in all size groups, at least in terms of hedge returns, these three anomalies are pervasive."

"Which anomalies are present in all size groups and produce returns that vary systematically from the low to the high ends of the sorts? Momentum satisfies both criteria. Abnormal VW momentum returns are strongest for microcaps and weakest for big stocks, but they are impressive in all size groups, and they increase rather systematically from strongly negative for extreme losers to strongly positive for extreme winners. EW momentum returns in all size groups also vary smoothly from losers to winners."

"...among the remaining variables, only net stock issues and momentum show strong marginal explanatory power in all size groups in the regressions...."

Eugene Fama and Kenneth French are known for "Efficient Market Hypothesis". Many investment advisors and financial planners who take a passive approach often anchor to the hypothesis that the market reflects information too quickly for them to exploit, so they may as well buy and hold a group of index funds. Supporters of EMH continue to change the definition of what makes a market efficient, making it difficult to falsify. However, since the first EMH study was released nearly forty years ago, new knowledge has falsified the hypothesis that markets efficiently reflect new information (news). There is at least one anomaly they admit is pervasive: Momentum. Momentum can mean many things and certainly is applied in different ways by different investors, but it basically means buying stocks that have recently gone up (over the past 3 - 12 months) and selling (or at least avoiding) those that are going down. That may sound familiar, since it is a strategy used by Shell Capital Management to achieve the results you see in our separate managed account program, the Asymmetry Investment Program. We, of course, agree that momentum is a return anomaly and its robustness is at least one factor in creating the results you see in our Performance Composite. However, it takes more than just a price momentum ranking system to create those kind of results. Absolute returns and an asymmetric risk/reward profile seen in our investment program cannot be achieved by relative price strength or price momentum alone; it requires great skill at portfolio management and that involves an edge in risk control. With that disclaimer out of the way, we share some of the comments from "Dissecting Anomalies" a paper by Fama and French that studies some of the anomalies like Momentum.

The following quotes are taken from: Fama, Eugene F. and French, Kenneth R., Dissecting Anomalies (June 2007). CRSP Working Paper No. 610.

From the abstract:

 "...momentum is pervasive".

Page 1:

"The premier anomaly is momentum (Jegadeesh and Titman (1993)): stocks with low returns over the last year tend to have low returns for the next few months and stocks with high past returns tend to have high future returns. Like the patterns in average returns associated with net stock issues, accruals, profitability, and asset growth, return momentum is left unexplained by the three-factor model of Fama and French (1993) as well as by the CAPM."

“…return momentum is left unexplained by the three-factor model of Fama and French (1993) as well as by the CAPM.”

Page 3:

 “We find that, at least in the extremes, net stock issues, accruals, and momentum produce strong abnormal returns for microcaps, small stocks, and big stocks. For net stock issues and accruals, however, there are chinks in the armor.”

Page 4:

"The two clear winners, in terms of strong average regression slopes for all size groups, are net stock issues and momentum."

"We also argue that the observed relations between average returns and the anomaly variables (positive for momentum and profitability, negative for net stock issues, accruals, and asset growth) are at least roughly in line with the valuation equation."

Page 9:

"Which anomalies produce strong average hedge returns for all three (micro, small, and big) size groups? The clear winners in Table II are net stock issues, accruals, and momentum."

"Finally, momentum sorts produce strong positive average VW and EW hedge returns for all size groups."

"Our momentum results complement those in Hong, Stein, and Lim (2000)."

"Since stock issues, accruals, and momentum produce large average EW and VW abnormal hedge returns in all size groups, at least in terms of hedge returns, these three anomalies are pervasive."

Page 11:

"Which anomalies are present in all size groups and produce returns that vary systematically from the low to the high ends of the sorts? Momentum satisfies both criteria. Abnormal VW momentum returns are strongest for microcaps and weakest for big stocks, but they are impressive in all size groups, and they increase rather systematically from strongly negative for extreme losers to strongly positive for extreme winners. EW momentum returns in all size groups also vary smoothly from losers to winners."

page 16:

 "...among the remaining variables, only net stock issues and momentum show strong marginal explanatory power in all size groups in the regressions...."

Source: Fama, Eugene F. and French, Kenneth R., Dissecting Anomalies (June 2007). CRSP Working Paper No. 610. Available at SSRN: http://ssrn.com/abstract=911960