Dimacos Diversified Program, Market Review for November 2016
Another month of surprises. 2016 will go down as a year where some of the most unpredictable events. In June we had the surprising Brexit voted, in November Donald Trump became the next US President and in December the Italian public voted No to major constitutional reforms causing the resignation of Mateo Renzi (albeit the last one was fairly expected).
This is the nature of the future. It is not just unknown and unpredictable but unknowable, and therefore impossible to predict consistently. It also explains why systematic trading is so successful over the long term. It is not based on expectations, views, opinions, past experiences or anything that creates a bias. It is founded on objective data from the past and the present, it is free from biased opinions and other human weaknesses and looks at the world for exactly what it is., totally unpredictable.
The beginning of the month was clouded by the FBI reopening of the investigation against Hillary Clinton and the cause this could have on the US Election result. The markets carried over the October defensive mode with stocks continuing to fall. The closing of the investigation gave room to euphoria in the markets reversing the previous negative sentiment and with it the direction of traded prices on everything from currencies, bonds and equities to commodities. As the election result became clear, markets reversed and crashed again, only to rebound a few hours later. The market weighted Trump’s economic policies, a combination of additional spending and tax cuts and interpreted these as a strong boost to the economy. The positive sentiment did not, thankfully, reverse again until the close of the month.
Thanks to our systematic approach, combined with our diversification into six different asset classes, we managed to protect capital in an otherwise very difficult and unpredictable environment. Dimacos Fund, which trades the Dimacos Diversified Program, registered a nominal negative performance of -0.32%. This compares favourably against the SG CTA Index which lost -1.83%. Our relative outperformance was due to the higher diversification our Program has compared to the standard SG CTA Index constituent. Unlike the typical members of the Index, our Program has an overlay into long-equities whose strong monthly performance provided good protection against losses in futures. Our result, though does not compare favourably, against the S&P 500 which advanced +3.68% during the month. True, we had strong profits in equities. However these were not sufficient to offset the losses we incurred from the stop out of a number of futures positions around US Election time. At that point, significant volatility caused our risk budget for a number of currency and indices positions to be met, triggering our risk management systems to close those positions. During a severe market stress, it is better to lock-in small losses and sleep peaceful at night than leave them open in the hope they will reverse. As noted in the second paragraph, the future is unknown and unknowable so one day they will not reverse, they will grow bigger and bigger, eventually locking a loss much higher than what could be tolerated.