TRADE THE PSYCHOLOGY
The Investment Philosophy of Barradale Asset Management
Welcome
Here’s a short video discussing our investment philosophy.
Our views on market efficiency and generating alpha are discussed further below.
Markets are not efficient because:
Investors’ errors are correlated
- We share the same psychology, so we make similar mistakes.
And arbitrage capital is limited
- Arbitrage is risky (LTCM) so markets limit the available capital. This balances risk and expected return in the long term.
The four ways generate alpha...
Judgement based on experience
- Individuals typically learned their trade at a hedge fund or investment bank, have an MBA or CFA, and were taught rational-markets finance.
- Similar backgrounds lead to similar choices, trying to repeat what worked in the past.
- Many trades are now crowded, with high risk and low returns.
Trade past return factors or patterns
- Most patterns are very well known in the hedge fund community.
- Hedge funds compete with lower-cost long-only strategies (ETFs and other funds using patterns as a screen).
- Capital sloshes about, with high returns when capital sloshes in and negative when it sloshes out.
- High risk and low returns
Design a better algorithm
- Technological arms race. Must run faster just to keep up.
- Everyone has the same dataset for back-testing, so algorithms are often similar and they create exposure to systemic risk (quant crash, flash crash, etc.)
Trade the psychology
- The psychology creates patterns in the markets, so it is the most direct approach.
- Must understand psychology, academic finance, practical finance, accounting, etc.
- High barriers to entry, so high persistence of returns, but also high exposure to return factors/patterns (due to correlation with other funds).
- The approach of Barradale Asset Management
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