Our investment strategies focus on factors which are overlooked, poorly analysed, or simply lie outside the scope of mainstream forecasting techniques. Markets cannot fully discount information which investors either don’t yet fully understand, or which rigid, process-driven risk models struggle to quantify. Pools of unresolved factors remain largely free to develop in the blind-spots of mainstream analysts, and bubble beneath the markets’ collective radar where they leave few traces in conventional risk metrics such as VAR. So-obscured factors are destined to ultimately pop-up as an earnings’ ‘beat’, ‘miss’ or other surprise, triggering an asymmetric return profile, a slow but profound valuation shift, or perhaps a volatility spike. Collectively they represent a deep source of alpha for those ahead of the game.
Investment Philosophy
A rich source of alpha
Obscured or poorly analysed ‘’stealth factors’ are destined to pop-up somewhere and trigger an earnings’ beat, miss, or some other surprise. An asset price non-linearity is a common result. Alternatively, these ‘stealth factors’ may manifest themselves insidiously over time and major revaluations are common in such circumstances. They include the sharp post-2010 fall in the cost of capital attributed to fast moving consumer stocks, fundamental changes to structure of bank earnings, a collapse in the natural real rate of interest, or significant shifts in bond, gold and other commodity prices. In each case, blindsided analysts face a simple choice: ‘recalibrate’ their models to market-traded prices, or risk irrelevance. In this way ‘pricing’ masquerades as ‘’valuation”, which reinforces and systemises the underlying problem. Deep seams of alpha are continuously laid down in this manner.
A forever problem
All investors suffer from the recurring irritation of missing market moves which consensus can only explain after the fact. It is especially problematic when the drivers have been visible for some time, but their significance was either lost, or not fully recognised. Instead of unbiased insights and accurate forecasts, investors end up with elaborate retrospective sell-side explanations of past events. These are typically delivered under a cloak of superiority woven from reassuringly thick reports, obscure acronyms, and a mountain of statistics. Yet, the two most important questions remain unanswered: Which assets are most likely to outperform? Where and when is the next accident likely to occur?
Mainstream forecasters routinely process vast quantities of information, yet still dismally fail to accurately forecast asset prices ex ante. By synchronously turning the handles of standard valuation models, the sell-side certainly helps the market to discount lots of new information. This homogeneity, however, biases these techniques to develop systematic blind-spots over time. Factors concealed therein include the poorly understood, unprecedented, and uncertain factors which are so often the final arbiter of asset prices. Forecasting failure is all but inevitable.
Why is the sell-side so dismal at predicting asset prices?
Emerging negative factors visible to consensus
Emerging positive factors visible to consensus Positive/Negative factors discounted in asset prices  Stealth factors obscured from mainstream’s view
Mainstream Forecasts Consensus Barrier
Beyond the Limits