Twin Red Asset Management discusses Investment Strategy and Tactics

December 11th, 2009		\| More
Contributed by: Emerging Manager Focus
Founded in 2008, Twin Red Asset Management is a boutique asset management firm with a focus on discretionary short term equity trading with low net exposure. The firm derives their trading strategy from multiple different factors, including interpreting company specific and macroeconomic news, and maintains holding periods between 2-10 days, with occasional intraday positions and long term holdings. Twin Red took time to discuss their investment strategies and philosophies with Emerging Manager Focus and give an overview of their perspective on the current market. Emerging Manager Focus: What are the investment strategies that you employ? Twin Red: Twin Red employs a low net exposure (between -20% and +20%), trading oriented, discretionary long/short equity strategy through liquid US listed and Nasdaq (primarily large mega cap) securities. The average holding period ranges between 2 and 10 trading days (80% of trades), intra-day (10%) and longer than 2 weeks (10%). Trade ideas are generated by interpreting macro events, company & industry specific news and market sentiment. Risk & P&L Management are integrated into the core investment style. Twin Red seeks to deliver a skewed distribution with winning trades outnumbering and having a greater relative magnitude than losing trades resulting in attractive, compelling and differentiated returns that are non-correlated to equity, fixed income, or hedge fund indices. This objective has been achieved in practice - in the 21 months since inception, we’ve delivered 13 positive months; 8 of which that have been greater in magnitude than our worst losing month. It is this type of skewed return distribution that we feel differentiates our strategy. EMF: With nearly 100% of your investments being U.S. based, will you expand outside of the U.S. to other emerging markets, or commodities, currencies, foreign bond trading? Twin Red: Our expertise is in trading securities traded in US markets where there is plenty of opportunity so we have no plans to expand into markets outside of the US. EMF: What is the breakdown of the limited exposure outside the U.S. if there is any? Twin Red: We monitor foreign equity, bond and commodity markets very closely as they are tied to equity markets and macro events that impact these markets can be catalysts for trade ideas. Our investment approach will occasionally generate trade ideas in country specific equity ETFs, foreign exchange ETFs, or commodity ETFs and we feel comfortable trading these instruments. EMF: What are the risk management functions you have in place? Twin Red: Overall Risk Management is a combination of risk prevention (proper trade entry) portfolio construction, p&l management, risk mitigation, and risk monitoring. The President, CIO, and Chief Risk Officer constantly monitor the portfolio in real time and go over the analytics throughout the day. Additionally, each morning, the end of the previous day’s portfolio is examined carefully and certain metrics are applied, including stress tests, exposure compliance tests, and concentration compliance tests that check to ensure the portfolio is within the hard exposure and concentration limits. If any of these limits are approached they are brought to the attention of the CIO by the Chief Risk Officer. EMF: What other functions do you have in place beyond the above stated risk management? Twin Red: While we do all of the above, we view P&L management as the only real effective method to control risk. By P&L management, I mean our approach to trading: if a position is losing money, it is exited – no questions asked. We do not develop a bias to the market or to a position and never double down – just the opposite, we let the market dictate if a position is right (making $$) or wrong (losing $$). This reinforces our CIO’s natural approach and is a hallmark of Twin Red’s strategy. Because we are in securities that trade at least 1 million shares per day, we can exit positions in seconds if our view changes or if losses are incurred. EMF: What factors have the greatest affect on your investment strategy? Twin Red: One factor that has been challenging but also creates significant opportunities has been the unpredictable nature of government intervention, impacting financial and healthcare sectors specifically, and gauging the market’s reaction thereto. Generally, our strategy is reactionary and interpretive more than predictive. EMF: Is there a specific niche sector that Emerging Managers are overlooking that they could focus on? Twin Red: We trade across sectors and tend to gravitate towards those exhibiting the most price action. I don’t know that there are any sectors that are patently overlooked. I think emerging managers should stay focused on their core expertise and not try to do too much too fast. EMF: Do you have any advice to Emerging Managers that could help them in their future endeavors? Twin Red: My specific advice depends on the manager’s strategy, but one constant is to always remain nimble and adaptive because the market evolves every day. Further, in this environment, very few managers should expect to raise hundreds of millions overnight. I feel that it is critical to get a track record started; then if you truly have a differentiating edge, over time the performance record will standout – we always like to say that we are building our business the old-fashioned way. Twin Red Asset Management is a boutique asset management firm based in New York founded in Feb 2008 by Peter Nash, Michael Redman, and Brian Nash. For more information, please see its investor profile below.