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Investment Methodology

The overall investment objective is intelligent capital appreciation, accompanied by low risk.

Views are formed top down. Understanding the market position gives an insight into the stability of the current environment as well as the causes of pricing anomalies and how they may evolve. These structural inefficiencies within the capital markets, and the miss-pricings they create, can be used to construct trades that express views with valuable asymmetrical risk/reward characteristics.

As a function of those aggregate market views, individual investment opportunities may exhibit analogous asymmetrical risk/reward profiles. Conclusions as to future price trends and relative valuation of asset classes are based on both fundamental and technical considerations in approximately equal measure. Technical analysis aids timing as well as the strategic positioning. Potential investments are ranked based on a range of factors and this investment ranking identifies outliers which are bought or sold respectively.

This technique has produced superior returns over previous methods, substantially because non-extreme data-points do not appear to be as predictive. By focusing on outliers it is possible to extract information which may not be detected using standard statistical methods. Furthermore, there is a relatively low correlation of returns compared with a more traditional equity investment portfolio. The investment ethos is driven by the fact that low correlation is expected from strategies which are fundamentally different from decisions based on conventional statistical analysis.

It is believed that consistent net returns of around 20% per annum are achievable within the targeted risk constraints.

Position Management

Trading selection and frequency are responsive to market conditions. We will sacrifice some return to ensure the preservation of capital. The portfolio is generally comprised of 5 to 20 positions but may hold 100% cash for periods until sufficiently compelling investment opportunities arise. Positions are sized on the basis of several criteria including, but not limited to:

• The ability to structure a trade with a defined risk limit. This consideration overrides the strength of the
  conviction in a view.
• Certainty of P/L relative to expected worse case loss.
• How the trade relates to the rest of the portfolio.

The primary risks to the portfolio are:
• The view is wrong, either through misunderstanding the market situation or not appreciating that the market
  had already discounted the view taken.
• The timing is wrong and the position reaches its risk tolerance limit before the anticipated market action

These risks are mitigated through trade and portfolio construction. Each trade is subject to a specific stop loss, which is raised as profits accrue. Position size limits are also employed. Further monthly and annual loss limits reduce exposure during times of market dislocation. If losses occur, positioning becomes less aggressive.

To understand how we might construct a trade with a favourable, asymmetrical risk/reward profile click here to view a theoretical trade in silver.



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