Trend Following on Stocks
Cole Wilcox and Eric Crittenden of Blackstar Funds, LLC authored a white paper titled Does Trend Following Work on Stocks? This paper is being released exclusively first on my collection of sites.
Q. How did you get started?
A. When I was 19 I got hired on by a brokerage firm without really knowing what to expect. I quickly realized that that a broker was a sales job that involved a lot more cold calling than critical thinking. I was much more interested in making investment decisions than sales calls so I focused my business on profitably trading a handful of client’s accounts and eventually my own account. This led to a good run during the technology bubble of the late 90’s. In February of 2000 I was fortunate enough to recognize that my trading success was mostly a function of market environment. My intuition said that the low hanging fruit had been picked. I mostly went to cash and began to return client capital. My business partner Eric Crittenden and I met in summer of 01′. I was interested in transforming from a discretionary trading approach to a more systematic and sustainable process. Eric had the experience and skills required to tackle this project. He had been working on the development of trading models and risk management systems for a proprietary trading firm. He educated me on topics such as computer programming, statistics & systematic risk management. We work well as a team because we have distinctly different skill sets of equal importance and share a common vision. This has led to a successful partnership that resulted in the founding of our firm Blackstar Funds.
Q. Tell me about Blackstar?
A. Blackstar Funds was founded in 2003 to develop a multi manager fund with a focus on investing with systematic trading managers in the equity, commodity & financial futures markets. Our initial business plan was able to attract venture capital & board membership from retired hedge fund manager Tom Basso (Market Wizard’s). During our research and construction of the fund we were not able to find equity managers who we felt were systematic enough to meet our investment criteria. This led us to ask the question: Why can’t we find a systematic equity trend following fund?
Q. What was the answer?
A. We asked a number of large CTA’s and fund managers why they had not developed an equity product. The answers ranged from ambivalence and not wanting to get distracted from their work in futures all the way to statements that it simply does not work on stocks. One multi billion dollar firm went as far as saying “there’s nothing there”. We took this as an opportunity to do our own empirical research on the topic which has led the publishing of our findings and seeding of the Blackstar Diversified Equity Fund.
Q. Why did your research paper focus on a long only portfolio?
A. We wanted to show apples to apples comparison of an equity trend following strategy vs. a stock market index. We felt that including short selling would have distorted the comparison. Another big factor to consider is that the expectancy on short selling stocks in severely stunted relative to long positions because you are capped at making a maximum gain of 100% on your best trades. Long positions have no cap and can make gains well in excess of 100%. While there may be merit in further research into short selling it fell outside the scope of the paper.
Q. Renaissance Technologies of Medallion Fund fame has generated a lot of press recently with the launch of a new systematic equity fund. Is your strategy similar to theirs?
A. Our multi manager portfolio is actually an investor in this new fund. Although their strategy is “black box” with limited transparency we feel their fund’s overall strategy is probably a closer cousin to systematic trading based on price and volatility than bottom up fundamental value investing. That being said, only Jim Simons and his research team know the exact answer.
