Consider commentary from Hyman Beck still relevant in trading today:
Expectations and projections for the year ahead are quite varied from one Wall Street firm to another. As expected, there is no consensus theme. Prognostications span the range from optimism to pessimism: most at the very least are thought provoking while a few border on the ludicrous. At Hyman Beck our investment strategies do not incorporate any aspects of projections or forward looking parameters; rather our investment premise relies more on reactionary elements focusing primarily on following price trends versus predicting the future market environment. One thing is certain, the next eleven months will be filled with unpredictable events which will require a focused and disciplined approach to investing. Though the first month of the New Year has been quite challenging for traditional and alternative investments, we are encouraged by the opportunities which lie ahead and remain committed to our investment strategies…Equity prices declined in January on fears of slower growth and higher energy costs while fixed income markets ended the period virtually unchanged.
In the currency markets, the initial days saw strength in the US dollar followed by weeks of directionless trading. For our strategies, the start to 2005 has been disappointing. The sharp price reversals and lack of trends in a number of sectors were damaging to holdings in the long-term portfolio while our short-term strategies struggled with the lack of opportunities in a range bound market.
Their commentary is great for the candor. They are saying the first month of 2005 was not great, but reminding us all that one month means zilch.
Two things stand out in this commentary. The first is the explicit rejection of projections and forward-looking parameters as inputs to the investment process. Most investment managers spend considerable effort generating and publishing market forecasts. Hyman Beck states directly that their approach incorporates none of that. The investment premise is reactionary, following price trends rather than predicting where prices will go. That is a precise statement of the systematic trend following philosophy, and it is notable for its directness in a context where most managers speak in careful, qualified language.
The second is the honest acknowledgment that January 2005 was disappointing. Sharp price reversals and range-bound markets are the conditions that produce losing periods for trend following systems, and Hyman Beck says so without hedging. The candor serves a purpose beyond honesty: it educates investors about what to expect. A manager who explains their difficult periods in structural terms, “sharp price reversals and lack of trends were damaging,” is helping investors understand that the performance reflects the strategy behaving as designed in an unfavorable environment, not a breakdown in the approach. That understanding is what allows investors to hold through the difficult periods rather than exiting at the worst moment.
Background for Hyman Beck
Firm Disclosure
HB & Co. relies primarily on technical analysis and believes that future price movements in all markets may be more accurately anticipated by analyzing historical price movements within a quantitative framework rather than attempting to predict or forecast changes in price through fundamental economic analysis. The trading methodologies employed by HB & Co. are based on programs analyzing a large number of interrelated mathematical and statistical formulas and techniques which are quantitative, proprietary in nature and which have been developed by Mr. Beck and Mr. Hyman. HB & Co. employs risk management techniques with the objectives of limiting losses, controlling market exposure and capturing profits. HB & Co.’s trading approach also includes a “neutral mode” which may indicate that no position is appropriate in a particular contract or contract group in an attempt to preserve capital in trendless markets.
Hyman Beck principals include: Alexander Hyman and Carl Beck.
The neutral mode disclosure is worth noting. A systematic approach that recognizes when no position is appropriate in a trendless market is building capital preservation directly into its framework. Most trading approaches have a bias toward being in positions because activity feels productive. A system that stands aside when conditions do not support participation avoids the small losses that accumulate during choppy, directionless periods and preserves capital for the trending environments where the strategy has genuine edge.
Frequently Asked Questions
What makes Hyman Beck’s commentary notable?
Its candor on two fronts: the explicit rejection of forecasts and forward-looking parameters as investment inputs, and the honest acknowledgment of a disappointing month without qualification or excuse. Both reflect the intellectual honesty that characterizes well-run systematic operations. The strategy is reactionary, not predictive, and the manager says so directly. When it underperforms, the manager explains why in structural terms rather than attributing it to bad luck.
What is “neutral mode” in Hyman Beck’s trading approach?
Neutral mode is the state of holding no position in a particular market or market group when conditions do not support either a long or short trade. It is a capital preservation mechanism built into the systematic approach, designed to avoid the small cumulative losses that a trend following system incurs when there are no trends to follow. Standing aside is an active decision, not a passive one.
Why is one month of performance described as meaningless?
Because trend following performance is evaluated over full market cycles, not individual months. A single month that happens to contain sharp price reversals and range-bound markets will produce losses for any trend following system regardless of its long-run quality. Evaluating the strategy on one month is like evaluating a baseball player’s season on a single at-bat. The sample size is too small to be informative about the underlying process.
Trend Following Systems
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