FUND STRATEGY
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Introduction/Overview
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MimoMat™
Strategy
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Stock Surfing
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Examples and Illustrations
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Brief
Note regarding ETFs (Exchange Traded Funds)
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IPO Example
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The
News Example
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MimoMat™
Objective
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Practical Strategy and MimoMat™
Implementation
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A Word about Risk Management
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Contact Information
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Disclaimer/Disclosure
Introduction/Overview
The MimoMat™
strategy has been specifically developed for active hedge funds
trading listed equities on U.S. exchanges. Basically, this trading
strategy consists of taking advantage of micro movements in a stock
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. 2% - 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. 0.5% - 3% of the investment 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 fervent 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 events and rumors..
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 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 possible 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. 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.
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™
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™
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, often 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. On the left of this website you find several links
to popular ETFs.
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
trading and a stock is either extremely overbought or oversold). MimoMat™
traders are able to take enormous 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 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 maximum 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 produce income. Long-term asset growth over several
years for this fund model's assets is not an objective as for
reasons of efficiencies and the trading flexibility through the use
of the MimoMat™
strategy the applicable capital base must be limited (currently
at approx. $250 million per fund/trader)..
Every single day there are micro
movements within many higher volume stocks and ETFs, usually in
stocks 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
can be identified (some documentation from 2006 - 2008 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
1,500 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. That's why 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. You need to
stay liquid in case you get hung up with a position. Based on our
experience, it is our observation that in general it's very rarely
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.
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. Never should there be any exit penalties charged as each
investor should be at liberty to close their engagement 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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Cascada
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