The finding
The analysis is blunt about what is not new. The payoff shape is old. Keeping losses small and letting winners run has been run as a rule by trend-following funds since the 1940s, and anyone selling it as an invention is selling history.
What the analysis identifies as genuinely new is this: an investor is told, before investing, exactly what would make them leave. Four conditions, each with a level at which it fails. And then shown, every month, whether any of them has.
In the analyst's words, that gives an investor a reason to stay through a bad month that is not just faith.
The problem it removes
Investors can see only returns. Returns are noisy and they arrive late. So proving that an edge works takes years, and in the meantime every fall looks like the strategy might be broken.
That is the old problem, and the analysis names the cost of it plainly. Investors cannot check, while a strategy runs, that it is doing what it claims and that what it claims still works.
How investors cope today
The analysis sets out the workarounds, because workarounds reveal how much a problem hurts.
They wait for three-year records. They discount simulated results heavily, with reason: on one large study cited in the report, live results came in about 73% worse than the simulations. They put heavy effort into checking the operator. And they pull money out after bad stretches. The world's largest currency fund lost most of its money that way and closed in 2013.
The best available workaround, in the analyst's assessment, is to wait for a multi-year audited record, judge the edge from its ratios, and re-judge it every month by the latest return.
The new rule
Judge a strategy by whether its mechanism holds, not by what it has lately returned. Invest once you have seen the conditions hold. Stay while they hold. Leave when one fails.
The analyst proposes a name for it. Hold-by-rule investing. In a phrase, stay while the shape holds.
What changes in practice
Before
- An adviser watches a strategy fall 12% in a month, has only the number to go on, and usually advises trimming or leaving.
After
- Adviser and client agree, before investing, what would end the investment. In the bad month they see all four conditions held. They stay.
The analysis notes what that is worth. In a strategy where a few large outcomes carry the record, the recoveries after falls are the result, and they only belong to the investor who was still there. The cost of the old habit is to pay for the shape and sell it at the bottom.
What the analysis does not claim
Three things, and we publish them because a paper that omits them is worth less than one that does not.
- It does not claim this is a proven category yet. The analyst’s verdict is that it is a promising thesis rather than an established one, and will remain so until many investors are on record watching the conditions, investing, and holding through a fall.
- It does not claim the conditions remove all waiting. Three of the four can be checked from the trade record every month regardless of profit. The fourth, the profit-to-loss ratio, needs time before it means much.
- And it does not claim the practice cannot be copied. Publishing pre-set exit tests is something any manager could choose to do. None currently does. The analyst searched and found nobody offering investors a declared test of when to leave.
What we do about it
Observation before allocation. Any prospect can receive the same monthly report that investors receive, on the same day, including months where a condition has failed, for as long as they want to watch before deciding anything.
That is the whole offer. The conditions are published. The decision is yours.
The same report records evidence gaps, failed checks and recommendations, and is available on request, under NDA, at our discretion. Disclosure, as the report itself discloses: Henning du Preez, who appears on our team page, commissioned the analysis. The analyst applied its standard method and recorded its checks
Irrevio, Proof of Category Analysis V2.0, Steps 1 to 24. Extract. Full report available on request. Capital is at risk; past performance is not a guide to future performance. FX212 (Pty) Ltd is a juristic representative of CAEP Asset Managers (Pty) Ltd, FSP 33933, Category IIA. For information only; not advice, an offer or a solicitation.