Picking Up Pennies in Front of a Steamroller By: Gabriel PotterMBA, AIFA® 2013.01.09

While scanning the news, we note that another seemingly infallible quantitative hedge fund operation has recorded a loss for only the 2nd time.  The Winton fund, run by David Harding, has only suffered a yearly loss twice in its 16 year history.  Our article on Quantitative Investing describes these types of high speed investment operations that work by extrapolating and following trends in the market.  To summarize the article, quantitative investment programs work best when the trends in the market follow a pattern that can be correctly calculated; when trends change, these types of funds suffer. 

True, the losses for David Harding’s Winton fund weren’t too terrible – merely -3.4% in 2012 and -7.9% in 2011.  Still, the worry is that the risks for these types program are not appreciated its investors.  Investors looked at the history of returns and presumed that the investment had little or no downside risk.   There is a phrase in finance, “picking up pennies in front of a steamroller”, that describes an investment with deceptively low risk and modest returns that is prone to occasional disastrous results.  (For those who would like to learn about these sort of investments, type “Taleb distribution” or “black swan” into a search engine for some fascinating articles.)

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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