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Gary Gerstein on Symposium Panel at the Greenwich Roundtable. Topic: “Trading Strategies and the Monetization of Sentiment.”

Jan 19, 2012

On January 19, 2012 at the Greenwich Roundtable Gary Gerstein, President of Red Oak Commodity Advisors, shared his views on the symposium topic: “Trading Strategies and the Monetization of Sentiment.” The panelists were asked to share their ideas on how to make money in markets that have abandoned fundamentals. It was part of the organization’s look into different CTA strategies and what makes them tick. An introduction summarizing the symposium stated that, “Gary Gerstein practices the time honored craft of making
long-term discretionary decisions from fundamental factors.” 

Gary expressed his views on sentiment and consensus as they relate to making money (or not) in the investment business.

“Sentiment is a euphemism for consensus. Consensus is a normal distribution under a bell curve. The only place where you consistently lose is the middle, at the zero bound, where the majority of the bets are placed. If you consistently bet the consensus you are guaranteed to lose. This explains the poor performance of money managers, hedge funds, and CTAs. As industries they do not add alpha. The only way to win is to place positions away from the center. The closer you go to the tails the more likely you are to win big and lose big. If you can win you won’t need to win that often. Fundamental traders can’t predict the future. Our predictions are analyses of probabilities. First you need to understand what you don’t know. Sentiment changes more frequently than reality. Reality changes slowly and secularly. Sentiment changes hourly. Over time you want to bet on the fundamentals.”

The following is the transcript of Gary Gerstein’s excerpted speech as it appears on the Greenwich Roundtable Symposia Summary.

Gary Gerstein -  Red Oak Commodity Advisors  - Recently we abandoned our abacus and moved to the HP12c. The race is not always to the swift nor the battle to the strong but it’s the way to bet it. There are other factors that affect price that can’t be explained and go bump in the night. The bottom of the market is the point of maximum negative sentiment. The converse is also true. A corollary to that premise is that the lower something goes in price the more likely it is becoming attractive. The higher something goes in price is more likely it is becoming less attractive. This is true in the world of commodities. Declining price reduces supply, increases demand and sets forth powerful forces to reverse that decline. Sentiment is a euphemism for consensus. Consensus is a normal distribution under a bell curve. The only place where you consistently lose is the middle, at the zero bound, where the majority of the bets are placed. If you consistently bet the consensus you are guaranteed to lose. This explains the poor performance of money managers, hedge funds, and CTAs. As industries they do not add alpha. The only way to win is to place positions away from the center. The closer you go to the tails the more likely you are to win big and lose big. If you can win you won’t need to win that often. Fundamental traders can’t predict the future. Our predictions are analyses of probabilities. First you need to understand what you don’t know. Sentiment changes more frequently than reality. Reality changes slowly and secularly. Sentiment changes hourly. Over time you want to bet on the fundamentals. One factor we know is the world’s central banks have added $6 trillion to liquidity. This money will need to find a home and when it does it will have an unprecedented effect on prices. Inflation is not always measured by the CPI. It’s in housing, commodities and other areas. The developing world is growing geometrically in population and economic importance. There’s an enormous amount of sovereign debt out there. The central banks will try to inflate this debt away. Taxes and austerity won’t get it under control. The money management industry has always been backward looking. That product the clients most want to purchase should be the product they should have least. Clients say ‘don’t lose money and don’t embarrass me.' This creates a negative bias to the marketplace. Initially we’ll see an increase in all asset prices except bonds. After that equities will fight competition from rising interest rates. Longer term I’d rather be in agricultural than industrial commodities. Don’t underestimate the power that liquidity will have to propel equity and commodity prices. Increase your chance of success by not trading. Trading costs are significant. High turnover CTA’s have a 7-8 percent hurdle to break even which is the principle reason eighty percent of them disappear. Second, bias your positions to long backwardation and short contango. You can add 2% and get paid to wait. Third, Gerstein’s Law, don’t talk to clients about your positions. It inhibits the manager to make instinctual decisions and it dissipates whatever advantage may exist. Next, you make money in option markets by betting on things you anticipate, things you don’t know. You won’t make money on things you do know. Things you know are already in the price. Gerstein’s Law II, for each investment professional you add to your firm you reduce the compound rate of return by 10 basis points. Finally, we look for markets where we can earn 50 – 150% ROR and positively carry a position for 3 to 5 years. Our favorite positions are long natural gas, long lumber, short sugar, short JGB and long Dow futures. ggerstein@redoakcommodityadvisors.com

This transcript includes the opinions of investment personnel of Red Oak. While the firm’s investment strategy and philosophy is implemented to generate positive results for its clients, there is always a risk of loss in trading commodity futures. Only risk capital should be used to make such investments.  

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This fund was ranked based on the data in BarclayHedge's. CTA database
This fund was ranked based on the data in BarclayHedge's. Managed Futures Database
This fund was ranked based on the data in BarclayHedge's. CTA database
This fund was ranked based on the data in BarclayHedge's. Managed Futures Database

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This fund was ranked based on the data in BarclayHedge's. CTA database
This fund was ranked based on the data in BarclayHedge's. CTA database
This fund was ranked based on the data in BarclayHedge's. Managed Futures Database

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Past performance is not necessarily indicative of future results. The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.

 

Risk Disclosure Statement

Qualified Eligible Person Status. Futures trading involves a high degree of risk. Clients should only use risk capital to invest. Clients are only accepted if they satisfy the requirements in order to be deemed a “Qualified Eligible Person” as defined in Commodity Futures Trading Commission (“CFTC”) Regulation 4.7. By checking the box below, I certify that I am indeed a “Qualified Eligible Person” as defined in CFTC Regulation 4.7.