Mastering the Lost Art

of Short Selling &

Intelligent System
Trading Development
By Laurent Bernut, CEO, Alpha Secure Capital
www.alphasecurecapital.com
AGENDA
• IS STOCK PICKING OVERRATED ?

- THE FORGOTTEN FORMULA:

‣ SIGNAL MODULE: IS ENTRY or EXIT MORE IMPORTANT

‣ MONEY IS MADE IN THE MONEY MANAGEMENT MODULE

- “LA CONDITION HUMAINE”: OUR BRAINS WORK AGAINST US

• WHY IS THE SHORT BOOK KEY TO INCREASING AUM ?

- WHAT DO INVESTORS WANT ? FOLLOW THE MONEY

- HOW TO MAKE MONEY SELL SHORT ?

IS STOCK PICKING OVERRATED ?
 80% OF MANAGERS UNDERPERFORM
THEIR BENCHMARK
Fund Category Comparison Index 1-yr (%) 3-yr (%) 5-yr (%)
All Domestic Equity Funds S&P Composite 1500 60 86 74
All Large-Cap Funds S&P 500 60 85 87
All Mid-Cap Funds S&P MidCap 400 58 77 88
All Small-Cap Funds S&P SmallCap 600 73 92 88
Real Estate Funds S&P US REIT 42 91 92
Source: S&P Dow Jones Indices LLC, CRSP. Data as of June 30, 2014

Percentage of Fixed Income Funds Outperformed by Benchmarks

Fund Category Comparison Index 1-yr (%) 3-yr (%) 5-yr (%)
Government Long Funds Barclays Long Government 98 99 96
Government Short Funds Barclays 1-3 Year Government 45 51 49
High-Yield Funds Barclays High Yield 73 86 85
Source: SPIVA® U.S. Scorecard Mid-Year 2014
 WHY?
1. Markets dominated by institutions: average hard to beat

2. Not Focusing on Gain Expectancy

Gain Expectancy = Win% * AVG Win% - Loss% * |AVG Loss%|

‣ Signal module: Entry & Exit

‣ Money is made in the money management module

3. “La Condition Humaine”

WHAT’S MORE IMPORTANT –
ENTRY VS. EXIT?
IN EXITS, ONLY TWO TYPES OF STRATEGIES:
TREND FOLLOWING & MEAN REVERSION
Long Short

CLASSIC TREND FOLLOWING STRATEGY P&L DISTRIBUTION

Classic Trend Following P&L Distribution
Losses Profits

Low Win Rate

Long Right Tail = Capital Appreciation

CLASSIC MEAN REVERSION STRATEGY P&L DISTRIBUTION

High Win Rate = Compounding

Devastating Left Tail

CHANGE YOUR EXITS, TILT YOUR GAIN
EXPECTANCY
Long Short

ALPHA SECURE STRATEGY P&L DISTRIBUTION

• Positive Gain Expectancy: (Win % x AVG Win%) > ABS(Loss % x AVG Loss%)
• Capital efficiency = Compounding * Capital Appreciation
• Symmetry: Identical Distribution of Longs/Shorts P&L
Losses Profits

Compounding

Capital Efficiency

Capital Appreciation

No Left Tail
MONEY IS MADE IN THE MONEY
MANAGEMENT MODULE

Gain Expectancy = Win% * AVG Win% - Loss% * |AVG Loss%|

 2 WAYS TO IMPROVE GAIN
EXPECTANCY
Losses Profits

Game of 2 Halves: simple way to cut losers and increase winners

1. Calculate AVG Win, divide by 2
2. Halve bets on losers below -1/2 AVG Win
3. Re-allocate proceeds to winners and/or fresh ideas
Game of 2 Thirds: Reduce free loaders
1. Add 1/3 of turnover to all entry dates
2. Halve positions in 3rd quartile performance on anniversary date
3. Re-allocate proceeds to winners and/or fresh ideas
 3 BENEFITS OF THOSE
GAMES
• GAIN EXPECTANCY IMPROVES
1. Cut losers, increase winners

• GOOD STEWARDSHIP:
1. Maintain conviction, but deal with problems
2. Easy to explain to investors, peers

• EMOTIONAL CAPITAL PRESERVATION

1. Fund capacity in when inertia sets in
2. Train the brain to switch from outcome to process
orientation
WHERE IS THE SPEED LIMIT?
Engine: Signal Module

Transmission: Money Management Module

Driver: “La Condition Humaine”

From Subconscious beliefs to
unconscious habits
 OUR BRAIN WORKS AGAINST US
• Rationalization Machines: Corpus Callosum

• Risk Appetite: Nucleus Accumbens/Anterior Cingula

• Future Self: rostral Anterior Cingulate Cortex

Source: Risk Appetite: NAcc/Acc Kuhnen Knutson, 2006, Rationalization machines: corpus callossum M. Gazzaniga 1962, Self deception: D. Goleman 1985, Future Self: rACC, Hershfield,
2006, Habits: basal ganglia, Wood 2002
GREAT TRADERS ARE NOT
SMARTER,

THEY HAVE
SMARTER
TRADING HABITS
 KUBLER-ROSS
DENIAL ANGER BARGAINING DEPRESSION ACCEPTANCE
Market
Sideways Choppy Bear Choppy Bear Quiet Bear Quiet Sideways/Bull Quiet
Regime

Market Technical support Institutions trim High short

Estimates downgrade Ratings downgrade
Signature penetration weight utilisation

Low estimates
Short utilisation increases Crowded Short
dispersion
"But the market "1) downgrade estimates 2)
Analysts "It's a one-off" "But it's cheap" "… Structural Short"
is wrong..." stretch horizon
Lingua "Inventory "2) Stretch our investment "…for the LT
Franca Adjustment" horizon to n*150% months" investors"
"but keep our "Buy" rating, LT
story still Intact"
 THANK YOU!
CONTACT US TO GET A FREE COPY OF
“GAIN EXPECTANCY DIAGNOSTIC TOOL” AT:
info@alphasecurecapital.com
Laurent.Bernut@alphasecurecapital.com
ALPHA SECURE