You are probably thinking through the haze of your Monday morning what the hell is Berman smoking and I will forgive you for pondering such thoughts, so let me explain.
Over the last 5yrs of allocating capital to emerging money managers I have witnessed repeated and unfortunate style drift from the traders new trading account. All investors want/expect is the trading style of the past to continue into the future. Of course investors would love the past performance that attracted them in the first place to continue but seeing a change in the style and structure of the new trading is a serious no-no.
If you look at the AxiSelect program you will see that one of the criteria for progression to the next phase is passing our style drift test.
So what is the basis of our Style Drift test?
Firstly, we include a healthy dose of common sense, you will be amazed at what we see. One obvious example is for instance when we had a trader who only traded the major crosses in the past suddenly became a Bitcoin trader with his new allocation.
However, we do use a more formal quantitative approach. In 1952 two mathematicians, Anderson and Darling came up with a technique to measure the goodness of fit of 2 sample distributions. The Anderson-Darling test is now a very well accepted test for checking whether a small sample of data is a good fit with the longer track record data.
As a final message to traders. Focus on developing a process that allows you to do more of the same and to remember the reason investors invested with you is because of the way you traded in the past. This doesn’t mean that you cannot and should not evolve your trading as market conditions and knowledge change. It does mean that when you are about to change things you should always communicate this with your investors to ensure that they have bought into your new way of thinking.
Looking forward to more profitable trading together.
The PsyQuation Team