Our Global Macro Process
How do we thrive in today's markets?
We aren't your typical investment firm. In fact, we do things a lot differently. Most financial advisory firms or investment firms provide a spectrum of investment models catered to your investment tolerance. These models leave a lot to be desired. Many models are based on a single factor and do not consider the risk of the individual components. A "diversified portfolio" may hold more risk than anticipated as we saw in the 4th Quarter of 2018 and the 2nd Quarter of 2020.
Humans evolve and adapt. As we receive new information we make adjustments that allow us to survive and thrive. Among the many reasons for our survival, we can adapt to the environment that surrounds us. Our strongest instinct is to survive to live another day.
Our investment process has evolved and adapted to the investment environment we were provided. We must play the cards that we are dealt. We have to base our decisions on probabilities and numbers, not on how we “feel” about this stock or that stock. It’s our job as risk managers to embrace the change rather than fight it. It’s not about being right, it’s about making money. Investing in how you feel is a fool’s errand.
Our Global Macro Risk Management process takes into consideration history, math and behavioral psychology. Most firms, including Wall Street, take a different approach. They base their decisions on economic theory, feel, valuation, and a “This time is different” philosophy. We don’t “feel” anything with regard to the investment decisions we make. We contextualize everything with math. If we can’t use math to provide answers, we simply don’t have a view. Thus, we focus on those facts and invest accordingly.
We provide an opportunity for investors to place their hard earned assets with a firm that uses modern day risk management tools. Forecast Capital Management has created a way for individuals and families to access a hedge fund strategy that was typically only available to the ultra high net worth. Our risk management tools allow us to make high probability investment decisions prior to major market moves. Obviously, nothing is certain, but our goal is to be more right than wrong, provide consistent gains, compound returns, and preserve your hard earned capital.
Quantamental Risk Management
What is "Quantamental risk management"
The rise of "quants" – investors who use algorithms and program-based mathematical models to trade markets – has changed the game for investors. Ever-increasing computer processing power and the proliferation of "machine learning" tools will only escalate this arms race.
For "fundamental" investors – investors diligently modeling companies to gain an edge on stock valuation – all is not lost. At Forecast, we think investors can gain an edge on Wall Street consensus by marrying both quantitative and fundamental investing.
We call this "quantamental."
What does a "quantamental" risk management process look like?
Our hybrid investing approach combines:
- Proprietary quantitative analysis
- Bottom-up sector research
- Top-down macro research with an emphasis on duration
The end result is an intelligent, high-octane investment process that draws on insights from over 40 research analysts. These analysts cover everything from Global Macro and Retail, to Energy, Restaurants and Washington Policy research.
Our Multi-Factor, Multi-Durational Model
This risk management model is multi-factor meaning it’s based on the price, volume and volatility of a publicly-traded security. This model is what drives our daily alerts and throws off Bullish/Bearish risk management signals throughout the course of the trading day.
What does a security’s last price tell you?
The most popular price-based answers to that question are the 50 and 200-day moving averages, based on closing prices of an index or an individual stock.
Other systems, such as Candlestick Charts, track daily open, high, low and closing prices. But they still work off only a single factor, and thus do not present a full risk management picture.
Price charting is based on the assumption that forces beyond mere Supply and Demand set the price of goods or securities. We don’t disagree with that. We disagree with how consensus tools contextualize it.
Since most investors care about the price of their holdings, shouldn’t they care about liquidity?
If the price of your stock goes up, did you make money? The reality is that you only make money when you sell at that higher price, and in order to do that, you need liquidity. If there is not sufficient volume traded, you will not be able to sell at your price – maybe not at all.
Price moves perpetuate TRENDs. Volume either confirms (rising volume) a bullish TREND, or calls it into question (decreasing volume).
Strong overall volume is generally seen as a sign of health in the markets, though isolated moves in Volume can signal turning points.
Stocks moving UP on decelerating volume have the potential to create a Liquidity Trap and could signal a coming correction, while an outsized burst of volume on a strong UP move in a stock could signal a breakout to new price levels.
Volatility is the statistical dispersion of prices of a security or index; the variance, or the standard deviation of prices for the security.
The higher the Volatility, the greater the price uncertainty of a position. That doesn’t mean that Volatility is bad. It means that you have to take it into account if you want to make good buy/sell decisions, across durations, in what we call the Risk Range.
If you don’t incorporate an analysis of volatility in your buy/sell decision making process, you will have to get used to “averaging down” to offset your timing mistakes. And as any seasoned trader can tell you, averaging down presupposes two things, both of which are unreasonable: an endless supply of money, and a stock price that finally goes back up.
Volatility is measured against other positions in your portfolio (relative Beta), and against broad market averages (market Beta). A “high Beta” stock is more volatile than the broad averages and is likely to both fall and rise by a greater percentage than the market does.
Risk-oriented investors are drawn to Volatility because they generally believe they can get in and out at the right time, and they believe they are better at timing Volatility than most other traders.
This is often based on a small number of lucky trades, or on forgetting unsuccessful trades. This common psychological trap is called Confirmation Bias. There’s also the adrenaline factor, which is great if you want thrills at a casino, but it has no place in a risk management strategy.
Since risk is non-linear (it happens fast, and slow, and episodically), it makes sense to attempt to contextualize changes in price and volatility across time.
Mainstream “technical” measures consider time/price relationships using a one-factor price momentum model (like a simple moving average). That doesn’t work.
These consensus metrics have become the Received Wisdom of Wall Street. Every “chart” is crystal clear, in hindsight. But these charts tell you nothing about power laws and/or phase transitions. No single-factor linear model does.
Our Multi-Durational proprietary system breaks the investment time horizon into three core durations:
- TRADE – the next three weeks or less
- TREND – the next three months or more
- TAIL – the next three years or less
At any given moment, every position in your portfolio will exhibit characteristics in each of these three durations, depending on a broad range of factors ranging from company-specific, to sector-specific, to broad market, to the global macro level.
The TRADE duration measures risk over the very immediate-term (3 weeks or less), and it shouldn’t surprise you to realize that an awful lot can happen in that time frame.
TRADE is the point of departure for measuring risk in the immediate term. And TRADE is the first signal you might look at if you are an active short-term trader.
The TRADE duration keys off of current events and macro correlations. As an example, a good earnings report may drive a lot of buying, causing the stock to look overbought on an immediate-term TRADE basis. Whereas a bad one might signal immediate-term TRADE oversold.
If you are a longer term holder, you can use the immediate-term TRADE duration to help you risk manage (sell some high, so that you can buy more low) your best ideas.
The TREND duration in the Multi-durational model measures risk over the intermediate-term (3 months or more) and back-tests as the most manageable in our model.
That shouldn’t surprise you as this is the duration where many investment strategies purport to live. Three-months or more captures Institutional Investors trying to handicap “the quarter.”
While immediate-term TRADE volatility can present you with buy/sell opportunities, contextualizing TRENDs, and whether the probability that they continue is rising or falling, is the most important skill set within the longer-term risk manager’s game.
The TAIL duration measures risk over the longer-term (3 years or less). After more than 15 years of trial/error developing this model, we’ve been humbled into submission on this front. It’s very difficult to dynamically risk manage investment ideas beyond that time frame.
Not to be confused with the popular definition of Black Swan “tail risks” that can often be qualitatively defined, we’ve submitted ourselves to Mr. Macro Market on this front and decided that TAIL risks are manageable, if you subject yourself to change and uncertainty.
Across all of our core risk management durations, the fulcrum point in the analysis is the rate of change. This is a critical difference compared to other modeling approaches. The key questions aren’t about whether things are good or bad – they are all about probability weighing whether risk factors are getting relatively better or worse.
Mathematically speaking, we’re talking calculus here (2nd derivatives). Physically, you can also think about it in thermodynamic terms. What factors are undergoing “phase transitions” (from one state to another)? Because once something has moved from bullish to bearish TREND, it’s often too late.
Put simply, TRADEs often educates us about the stability/fragility of TRENDs, whereas the direction of longer-term TAILs can be shocked when a TREND undergoes a phase transition.
The goal of any investor should be to successfully risk manage and preserve capital when markets become increasingly volatile while compounding positive returns when the market provides opportunity. Let us help you Create, Grow, and Preserve your wealth.
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