Enhancing the Performance of Discretionary Thematic Strategies

While in the long term, market valuations are driven mainly by fundamentals, in the medium and short term, market sentiment plays an important role in driving prices. Market liquidity depends on the investment community being pretty much evenly split on the outlook of an asset at the current price. That balance can be disturbed, sometimes violently, if general market sentiment changes rapidly. In the last few years, flow-driven, market making firms have retreated. They provide a buffer to the mood swings of the end investor, since their business depends not so much on the direction of the market, but on the volume of order flow, which in part is driven by those changes. Less market making capital, therefore, exaggerates the sensitivity of the market to the tides of sentiment. Given this development it is increasingly important to look for an edge in understanding the patterns of market sentiment and incorporating them into the investment process.

In this white paper we aim to show how investors can benefit from recent advances in extracting sentiment information from news flow and how to incorporate this information into their investment process to improve their return-generating ability and, just as importantly, manage their risk.

About the authors…

Michel van Tol, CEO at Retropi Limited and CIO at Huddlestock Capital AS, spends his time researching, developing and trading hedge fund strategies. He has 10 years of experience as a quantitative strategist in the hedge fund world having worked at UBS O’Connor and Meditor. He heads or sits on the board of a number of companies that span the financial and technology spaces. Michel holds a PhD in financial econometrics from the University of Maastricht, the Netherlands.

Jurgen Kruger, Director and Financial Risk Specialist at Retropi, focuses on risk management of hedge fund strategies. He has 20 years of experience in the financial services industry. He spent the last 9 years on the buy-side as chief risk officer for two hedge fund managers, Meditor and Concordia, covering a broad range of strategies. Previously, he headed the market risk control team at Deutsche Bank. Jurgen holds a degree in economics from University of St.Gallen, Switzerland.

 

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