FUND STRATEGY
>
Introduction/Overview
>
MimoMat™
Strategy
>
Stock Surfing
>
Examples and Illustrations
>
Brief
Note regarding ETFs (Exchange Traded Funds)
>
IPO Example
>
The
News Example
>
MimoMat™
Objective
>
Practical Strategy and MimoMat™
Implementation
>
Position Trading
according to the CF Strategy
>
Examples of Position Trading
according to the CF Stratgey
>
A Word about Risk Management
>
Contact Information
>
Disclaimer/Disclosure
Introduction/Overview
The MimoMat™
and
Position Trading according to the CF Strategy have been specifically developed for active hedge funds
trading listed equities on U.S. exchanges. Basically, the MimoMat™ trading
strategy consists of taking advantage of micro movements in a
particular stock/ETF
within its macro trend, and henceforth the name MimoMat™
(Micro movements within Macro trends).
It doesn't matter if the macro trend is upward or downward. Within
the longer term overall trend called the macro trend, virtually all
stocks, especially stocks with large trading volume and liquidity
provide so-called micro movements which usually do not change the
macro trend. There are some exceptions to the rule as e.g.
significant news related to a company could very well change the macro
trend of its stock price.
MimoMat™
Strategy
Micro movements within a macro trend usually take place on a daily
basis. Such micro movements may consist of an approx. 1% - 10% range
of volatility. It is intended to garner an approx. 25% - 30% profit
from this range in each transaction during such micro movements.
This strategy allows with minimal risk a net profit/capital gain of
approx. 0.25% - 3% of the invested capital per transaction. Often,
such profits can be captured within minutes and in some cases even
within seconds, and therefore this strategy allows for
a high transaction frequency within sequences of micro movements
during each day when such movements occur. This strategy is also
applicable in order to take advantage of various opportune market
situations as well as situations regarding specific equities such as
during special and active news and event cycles.
In order to take full advantage of
micro movements and to reduce risks regarding liquidity, a stock
must have a large trading volume, also so that through block trades
the stock price is neither significantly affected on the buy and the
sell side. Therefore, only stocks that trade several million shares a
day will qualify for the MimoMat™
strategy.
Stock Surfing
For illustration purposes and to put it into simple terms, the
MimoMat™
strategy is a form of stock surfing. Meaning, a wave, either upward
or downward, is identified and the investment professional takes
advantage of this wave as long as possible. Basically, the old Wall
Street saying "The Trend is your Friend" is applicable. Of course,
the MimoMat™
strategy is much more sophisticated as it not only identifies a
worthwhile wave or micro movement, but also provides an estimate
regarding the strength (potential percentage movement) of
such a wave/micro movement.
Examples
and Illustrations
On November 20, 2006 the Nasdaq-traded stock WYNN (Wynn Resorts)
opened approx. 5% lower from its previous closing price at around
$89 a share, down from approx. $94 a share. At that time, the macro trend of WYNN
had been upward for each of the previous 1-month, 6-month, 1-year and 3-year
periods with many micro movements within the general (macro)
trend. To obtain the highest possible accuracy and to reduce risk,
we also apply further dissections into so-called sub-macro trends.
Sub-Macro Trends are defined as shorter-term (the time frame may
vary) macro trends within a general macro trend. A sub-macro
trend may either conform to the direction of the overall macro
trend, but for a short period may also be contrary to the overall
macro trend as e.g. during correction phases.
In the case of WYNN shares on November 20th, a purchase price of
approx. $89 a share was available early in the session. The stock
rebounded quickly to approx. $92.50.
Using our MimoMat™
strategy we waited for the confirmation of the upward micro movement
― the rebound ― which was indicated by upward momentum through
increased volume on the upside. Therefore we bought the stock at $90
and within approx. 2 - 3 minutes the share price reached $91 and we
sold our position(s). A few minutes later, the stock reached approx.
$92.50 and then retreated again. The total upward micro movement
consisted of approx. 3.9% of which we captured approx. 1.1% of
profits within approx. 2 - 3 minutes.
Of course, in addition to this one transaction in the upward micro
movement, we could have also timed and evaluated the topping out
process of the upward micro movement at around $92.50 and then
perhaps sold a position short at around $92 to repurchase the stock
at $91 or so to generate yet another approx. 0.8% in capital gains.
Although it takes a lot of skill, also a special prepared mental
disposition in this regard, some traders may have been able to take
advantage of multiple swings in either direction of the stock price.
Brief Note regarding
ETFs (Exchange Traded Funds)
There are a number of components to
identify interesting micro movements, ... most predominantly aspects
regarding the volume and block trades indicating strength in an
upward or downward movement, as well as exceptional and various news
of interest regarding a particular company. In 2008, which was a
year for traders, there were many opportunities to utilize the MimoMat™
trading
strategy. For instance, in July 2008 there were temporary bottoms or
washouts in many sectors of the market, like in the airlines,
homebuilders, financials, etc. Many stocks rebounded by several
hundred percent from their lows within a couple of weeks.
But not
only individual stocks were very suitable for the MimoMat™
trading
strategy, but also sector indexes and their pertaining ETFs
(Exchange Traded Funds) and
ETNs (Exchange Traded Notes).
With the availability of more and more ETFs and ETNs, trading has
become a lot less riskier for professionals as it's often easier to
recognize the trend and micro movements within a sector or the
overall market than it is in individual stocks. Especially ETFs and
ETNs which offer some sort of leverage, frequently these also offer higher
volatility and therefore better trading opportunities. Another
convenient aspect with certain ETFs and ETNs is the ability to hedge
effectively with e.g. particular Short ETFs and Short ETNs and/or to
trade the market very effectively both ways on the upside as well as
on the downside. In the left section of this website you'll find several links
to popular ETF providers.
IPO Example
The NMX (Nymex) IPO on Nov. 17, 2006 was one of the best
short-term trading opportunities through a micro movement. It was
very easy to purchase the stock at the open at around $125 a share
and within 10-15 minutes the stock traded at around $152.
Realistically, it was very easy to sell the stock at around $145 and
to generate a quick 16% profit. Of course, in the case of an IPO, no
actual macro trend had yet been established, aside from increased
revenue and profit data of the pertaining company indicated in the
offering prospectus, and based on the fundamentals incl. comparisons
to other stocks in this particular sector regarding market caps and
so forth. Therefore, at least an estimated or imaginary macro trend
can be established. A speculation of this nature carries a much
greater risk, but then the rewards were significantly higher than
under the typical conditions for established stocks as this
transaction provided at least a 16% capital gain within several
minutes. But not every IPO is ideal to apply the MimoMat™
strategy.
The News
Example
As an additional example in this regard, we could e.g. look at the
following stocks: GM and MGM for November 22, 2006. As it was
announced that Kirk Kerkorian's Tracinda Corporation would
purchase an additional 15 million shares of MGM for up to $55 a
share, the stock opened significantly higher from the previous
closing price of $49. Realistically a purchase price of approx.
$52.50 a share was possible early on Nov. 22, and then shortly
thereafter it was no problem to sell the stock above $54 a share,
providing a 2.8% profit. On the other hand, while during the day on
Nov. 22 it was speculated that as a result of Mr. Kerkorian's
MGM purchase announcement, he may sell some of his GM holdings,
later in the afternoon of Nov. 22 it was confirmed that Mr.
Kerkorian's Tracinda Corp. would indeed lower their GM holdings
by approx. 25% to a total of 7.4%. GM stock dropped from around $32
a share to approx. $31 a share, which allowed a profit of approx. $1
a share or 3% within minutes during this particular micro movement.
In recent times, especially since the summer of 2008, there have
been numerous opportune news occasions with significant stock
movements with now the popular contributing factor of overemotion
(when technical indicators are ignored because of purely emotional
or speculative trading and a stock is either extremely overbought or oversold). MimoMat™
traders are able to take advantage of the overemotion
component. We had another interesting MimoMat™
trading opportunity in the last three days of 2008 as Dow Chemical
(DOW) was notified by the country of Kuwait that it wouldn't
proceed with a multi-billion dollar venture and therefore
speculations arose that Dow's pending acquisition of Rohm & Haas
(ROH) was endangered. As a result ROH shares opened almost 25%
lower on Dec. 29, 2008 and traded as low as below $48 a share.
During the day ROH shares rebounded to approx. $54 and a couple days
later on Dec. 31, 2008, ROH shares were trading up at over $62 a
share, which allowed for a nice rebound trade of approx. 29% within
just 3 days. Of course, the MimoMat™
strategy would have called for multiple trades and continuous profit taking during each
trading day in order to secure profits as the future is always
uncertain.
MimoMat™
Objective
The key objective is to produce and secure capital gains
through each transaction within the shortest possible time frame by
also significantly reducing the risk of potential losses in such
transactions. The purpose of the MimoMat™
strategy is to generate income while keeping high cash positions at
the end of the day. Over the long-term significant asset growth may
be achieved by this fund model as frequent trading profits are
accumulated.
Every day there are micro
movements within many higher volume stocks and ETFs, usually in
stocks/ETFs that trade at least several million shares on a daily basis.
The opportunities abound and with the MimoMat™
strategy potential micro movements within certain types of stocks/ETFs
can be identified (some documentation from 2006 - 2010 regarding the
implementation of the MimoMat™
strategy is available through the following link
http://www.be24.at/blog/author/dietmar_scherf
- German only!).
Practical Strategy and MimoMat™
Implementation
Profits have to be secured quickly. Each trade should be
profitable, even if it's only a small gain. The saying goes,
"that you can't go broke taking profits." Example: from over
1,000 trades in 2008 (the worst year in the stock market since
1931), we encountered only 13 trades net that had a nominal
loss, which included all our hedge position trades that were
"intended" to produce a loss as gains from each counter position
produced gains above the pertaining loss of the hedge position. As
each trade is weighted very carefully, even in the case of a hedge
position trade we were able to produce a profit from almost every
hedge position as stocks and ETFs run in waves and cycles.
But
sometimes, every trader, even with the use of the MimoMat™
strategy, gets hung up in a position for a certain period of
time and then Position Trading according to the CF strategy
can be extremely useful to even turn a losing trade into a series of
profitable trades. But it's good to use only a portion of the available
trading capital for each trade. Depending on the market environment
and the overall momentum and/or situation we suggest no more than
approx. 10%-20% of the available capital for a trade or parts
thereof for
Position Trading according to the CF Strategy. You need to
stay liquid in case you get hung up with a position and
Position Trading according to the CF Strategy provides such desired
liquidity. Based on our
experience, it is our observation that in general it's hardly ever good to book (realize) losses unless such losses can be
compensated by a counter trade. While single stocks can go under,
there's somewhat of a safety when trading in ETFs, because
eventually, even if it takes a longer period of time, most ETFs will
recover as such function as indexes and/or are actual index ETFs.
So while a good trader will be able
to book (realize and secure) daily trading gains, there will
be those rare positions including some hedge positions that will be
held with a paper loss until such a position is back to par or
preferably produces a profit. Therefore, the overall performance of
a portfolio may show a paper loss for a certain period of time, even
if daily trading gains are generated and the cash balances are
enhanced. For risk management purposes, it's also recommended to
only trade in stocks/ETFs that also offer a long-term investment
potential. With this strategy, over time the overall performance of
such a portfolio will be significantly better than most strategies
as the few positions with a temporary paper loss will recover
eventually and as daily trading gains are constantly accumulated. We
also think that depending on market situations, it can be very
profitable to trade in the same stocks/ETFs for days and weeks over
and over again as the trader gets to know the pattern/behavior of
particular stocks/ETFs more intimately.
Position Trading according to the CF
Strategy
Position Trading according to the CF Strategy can be one of the
most profitable trading techniques. How does it work? Certain
equities and/or ETFs are analyzed and at some point in time one or
more positions are bought in a particular equity/ETF. If the price
of that particular stock or ETF goes up, then some or all of the
positions are sold for a profit. Once the price of the particular
stock/ETF falls again, and the situation is still favorable, then
one or more positions are repurchased at the apparently lowest
possible price at a certain time in order to once again profit from
a price increase.But here comes the heart of the
strategy. It really doesn't matter if the price of a security goes
up or down as the active position trader will constantly trade the
various positions in a stock/ETF according to trend. As the position
trader buys and sells the various positions in the particular stock/ETF,
profits are being generated. If the price trend is temporarily
downward, then some or all of the positions in a particular security
will be sold with the purpose of purchasing these positions back at
a lower price, ... similar to short sales in a security. We call
that strategy "Internal Shorts" as we already own the position(s) we
sell into a downward price trend regardless of the original
purchase price so that we can repurchase the sold positions at a
lower price. Therefore we don't need to borrow securities from a
third party and we don't incur expenses for borrowing securities
either.
The original objective of purchasing
positions in a particular stock/ETF is the expectation that the
price of the stock/ETF will increase over the long term. Of course
the opposite, the speculation for falling prices, is also a
potential strategy, but we won't discuss it here as we don't want to
confuse and we don't want to deal with real shorts regarding this strategy.
Our objective is to purchase positions in stocks/ETFs that have a
long-term potential of price appreciation. Volatility is key to
Position Trading according to the CF Strategy. Most positions might
be traded even on an Intraday basis for a year or even longer
depending on trend and market situations. Even as stock/ETF prices
advance, the purpose in our strategy is to constantly secure profits
on the way up. As anything can happen from one day to another, it's
important to stay as liquid as possible and to trade as frequently
as possible. Also in Position Trading according to the CF
Strategy
we apply the above explained
MimoMat™
trading strategy, meaning we take advantage of micro movements
within a macro trend. Depending on volatility it is not rare to
trade positions in a particular stock/ETF 5-10 times daily.
As not every stock/ETF will have
sufficient volatility on a daily basis, it can be helpful to select
at least a handful or even a dozen securities which can be used for
position trading. Depending on the overall market trend, position
traders may also choose to trade Short ETFs via position trading in
a downward market, but they need to be very careful to have the
proper balance between "Internal Shorts" and actual Short ETF
positions, so that when the market turns they have the proper hedges
in place to take advantage of short-term spikes and of trend
reversals.
It's important to note that even when
Position Trading according to the CF Strategy is implemented, that
the actual value of the total portfolio may trend lower for a
certain period of time. Why? Because core positions may lose value
during a certain period due to the price variations of such
positions even if daily trading profits are generated. But over the
long term such positions should gain value as the prices of these
positions increase. As various positions are traded, the total
portfolio value may trend lower for an extended period until the
price action is once again to the upside. But once prices are going
up in the core positions the profit momentum also increases. On the
one hand the prices of the core position holdings increase and on
the other hand the accumulated trading profits also increase the
portfolio value.
Examples of Position Trading
according to the CF Strategy
For instance, if XYZ stock/ETF has a current price of $40
and we expect it to rally to $60 over time, the
Position Trading according to the CF Strategy will begin to purchase a first
position in XYZ at $40. If the price of XYZ rallies to $42 and the
momentum fizzles, and depending on the overall market situation,
then the position would be liquidated at $42 securing a 5% profit of
invested capital. But if the momentum continues and depending on
it's strength, perhaps another position in XYZ was bought at $41,
$42 and so forth until the momentum in the price action of XYZ
fizzles. Then if e.g. 2-3 positions were purchased in XYZ, one or
all positions may be liquidated at the apparent top of the current
momentum to secure profits. The time frame for trades like this is
often approx. 5-10 minutes and sometimes the momentary cycle could
last 15-30 minutes or even more depending on the particular stock or
ETF, and depending on overall market conditions.
Now, what happens if in the above
example the first position was bought at $40 and the momentum
suddenly fizzles and the price of XYZ doesn't move higher? Well, if
it stays at the $40 level, it is necessary to constantly observe and
analyze the situation and depending on the price action in the stock
we may liquidate that first position at par or with only a small
profit if the stock/ETF gets too boring. If there are obvious
indications that the price is turning downward, then we may sell our
position even below our original purchase price as a so-called
"Internal Short." Meaning, our intention is to repurchase the same
position at a lower price. Let's say that XYZ drops to $39.50 and
the momentum now seems to be to the downside, then we sell at $39.50
with the intent to repurchase the position at e.g. $38.50 or so, ...
therefore realizing a profit of $1 per share. Sure, we still have
the original position booked at an original purchase price of $40
per share, but nevertheless we just realized a 2.5% capital
gain/profit on that position in this trade.
Now, we continue to trade that
particular position as long as we like and/or as we see fit and/or
as long as the volatility in XYZ continues. If XYZ drops to $35 we
may add an additional equal share position and therefore performed a
type of average down, meaning one position at $40 and one at $35
gives us an average price of $37.50. The price would need to rise to
$37.50 to close out these two positions at par, but remember we
already generated a $1 per share profit on the first position trade of this
particular position. We may also just sell the $35 position at
$37.50 and generate yet another $2.50 per share profit (which
would be a 7.1% profit) for that $35 position. If the momentum
of XYZ continues to $40, then we may sell the original $40 position
at $40 and are left with par on that particular original position,
but in the process we were able to secure profits of $3.50 per share
or 8.75% total profit in equal positions of the original investment.
Often, such price action takes place Intraday and/or over a couple
of days.
Often, sufficient volatility can be
found in 3x leveraged Long ETFs like e.g. the FAS, DRN, EDC, TNA,
TYH, TQQQ, UPRO, etc. as well as in their counterparts the 3x leveraged Short ETFs.
The key is to e.g. use only approx. 10-20% of the available trading
capital in one particular stock/ETF and to divide that amount into
e.g. 3-4 equal parts. Or for illustration purposes only, you can
also say that you'd purchase a total of 800 shares of a particular
stock/ETF and then your first position consists of 200 shares of
this particular/ETF. The second position consists of another 200
shares or depending on market situation and momentum you may
purchase 400 shares for the second position. Once the whole position
has been purchased, either the whole position of e.g. 800
shares in our example can be traded back and forth or the 800 shares
are now traded in blocks (preferred) in e.g. two blocks of
400 each or in four blocks of 200 each, ... all depending on various
criteria like market action and market sentiment, momentum in the
particular stock/ETF as well as momentary and/or long-term
risk/reward potential, etc.
The bottom line is that skilled
frequent trading of the position in whole or in part (preferred)
generating profits in each trade will result in enhanced performance
over time. If correctly analyzed, the original position will trade
above the original purchase price while constantly generating
profits until such time. Again, if the particular stock/ETF
continues an upward trend, then it is recommended to sell in a type
of overheated price action and to buy in a momentary correction
phase, always considering the example of dividing the intended
position into various blocks. This produces enhanced liquidity in
order to take advantage of potentially lower prices.
Applying Position
Trading according to the CF Strategy also makes it much easier to
concentrate on continuously trading in the same securities for a
longer period of time, instead of constantly searching for new
securities and familiarizing yourself with always new securities.
Position Trading according to the CF Strategy allows the
position trader to get familiar with the particular securities and
therefore better understand their behavior regarding price action
during various market events in order to generate more profitable
trades. With frequent Position Trading according to the CF
Strategy lots of smaller profits should be accumulated resulting
in an enhanced overall performance while reducing the risk and
necessity of holding uncertain long-term positions.
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A Word about
Risk Management
While any engagement in the stock market is pure speculation and
there is significant risk of loss of some or even all of the
committed investment capital, there are numerous measures available
to each investor/trader to manage risk accordingly. As an example,
with the MimoMat™
strategy trading profits are secured constantly. To the many
available risk management methods regarding the actual trading, we'd
like to offer a few suggestions that might be helpful regarding the
effective and basic risk management when it comes to selecting a
particular hedge fund:
(1) For active Traders: Use ETFs
For active traders it can be safer to trade ETFs instead of
individual stocks in order to reduce the risk of exposure to one or
a few individual stocks. Also it can be helpful to implement a
hedging strategy via Long/Short ETFs in a particular sector. Also,
hedge funds may profit and manage their risks better by utilizing the
appropriate ETFs in their trading/investment strategy.
(2) For Investors in a Hedge Fund:
Understanding the Fund's Strategy
For investors, it's important to understand at least in general the
trading and/or investment strategy of the particular hedge fund
they're participating in.
(3) No Management Fees, but only
Success Fees
While virtually all hedge funds charge management fees, we do not
favor management fees. But instead it is more suitable to look for
hedge funds that only charge success fees (e.g. for each
successful trade and/or investment) as it is somewhat of an
indication that the fund's strategy may work on a longer term basis
as the fund's management only gets paid if they're successful in
their trading/investment pursuits.
(4) Transparency
Transparency is key for any relationship that is built on trust.
Each investor should be able to consistently check the actual value
of their investments. Therefore, it is recommended that hedge funds
offer their investors some form of checking their actual and updated
investment value via e.g. a website that consistently (daily)
updates the actual value (mark-to-market) of e.g. the individual unit. This also
facilitates an important risk management feature to their
participants as participants are enabled to constantly assess their
risk tolerance as they won't be surprised by monthly or quarterly or
yearly statements.
(5) No Lock Ups, No Exit Penalties
While it is understandable that some hedge funds utilize long-term
investment strategies in often illiquid investments which require a
lock-up period, most other hedge funds engaged in active trading
should have no lock-up periods at all, but instead offer their
investors exit opportunities at the request of the investor at any
time. There should never be any exit penalties charged as each
investor should be at liberty to end their involvement with a hedge
fund at any time and at no additional cost.
To look for all or some of these
criteria in a hedge fund can help to implement some important
personal risk management components for each participant as well as
the particular hedge fund itself. The fact is that markets produce
volatility and therefore even the best hedge funds are unable to
produce consistent returns and may even have occasional down years
depending on trading/investment strategies used and depending on the
overall market performance. But quality hedge funds with integrity
will offer their participants transparency, immediate exits and they
will not charge all kinds of fees but mostly stick to a success fee
only.
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