ver the past decade, the Absolute Return Trading Systems, Inc. (ARTS) team of professional investment managers, statisticians, chartered financial analysts, and computer programmers have thoroughly researched and tested various stock market timing strategies with one objective in mind - to create a disciplined trading system that delivers absolute returns in all types of market environments. We've succeeded.
What is a stock market trading system?
Stock market trading systems have been used by some of the world's most prominent and successful investors for decades. Jerry Parker (Turtle Trader), Ed Seykota, Larry Williams and Bill Dunn, to name a few, have enjoyed remarkable success. See our Recommended Reading list for useful references.
A stock market trading system is a collection of empirically-tested rules and formulae that generate instructions on when to buy, sell, or cash out of the stock market. It uses a set of algorithms - namely, objective rules and parameters free of human interference or bias - to trade in the market. Once these algorithms are in place, they can be back-tested using historical stock market data to generate information about how the particular strategy would have performed over various time periods. These results can then be analyzed to determine both the profitability and risk of the investment strategy.
It is paramount that different time periods and data sets be carefully tested to avoid system curve-fitting. The parameters are altered slightly to ensure that the algorithm is, in fact, robust and has not produced a particular return by chance alone. Our Algorithms are exceptionally robust and avoid mechanical optimizers, which frequently produce spurious results.
What is an absolute return?
In general, there are two kinds of investment return strategies - absolute and relative. How do these strategies differ? Relative return measures performance relative to an industry benchmark such as the S&P 500 or DJIA. Absolute return strategies, on the other hand, strive to generate investment returns independently, without reference to any particular index.
Most mutual funds, for example, seek to outperform a particular benchmark. If a large-cap equity fund had a performance of -7% and the S&P 500 (its benchmark) had a return of -9% over the same time period, the equity fund could state that it outperformed its benchmark by 2% (hence the term "relative return"). A relative return investment manager would be paid for this “outperformance” despite the fact that it produced an overall loss for the investor.
An absolute return strategy, by contrast, focuses on producing a positive investment return regardless of the performance of the overall market or any particular benchmark. It is not surprising, then, that absolute return is the strategy-of-choice for most professional investment managers in the hedge fund industry.
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