All fund managers claim that they see the markets differently; that they have bent financial alchemy to their purpose and in doing so, woven a new thread of distinct understanding into the ever-shifting fabric of capital markets, which in turn only they can then read with success.
Time has passed
The problem with these claims is that fundamentally, true innovation can never come from repetition. Managers incubated in larger, longer established shops statistically invest either in line with their mentors, in opposition to their mentors, or both, in varying percentages across myriad asset classes — but rarely do they invest in entirely new directions or via mechanisms of thought not present in their incubators. And so from pedigree (however impressive that pedigree might be), investors gain little more than thin profits and the empty comfort of brand, marginally altered and repackaged as something new. There was a time when this was acceptable; when this was enough — but that time has passed. Today, investors demand more.
A quantum leap in modern investment philosophy
Kaiju Capital Management’s uniquely evolving strategies represent a quantum leap in modern investment philosophy, imagined and implemented by a diverse collective of physicists, mathematicians, financial behaviouralists, data scientists, cryptographers, pattern specialists, and professional traders. Where other fund managers attempt to wedge both established and emerging predictive tools into outdated investment models, Kaiju created its strategy locus from the ground up by fusing the four most powerful of what we refer to collectively as Mechanisms of Reasoning™ — Quantitative Analysis, Behavioural Finance, Quantum Mechanics, and Artificial Intelligence — into a powerful ideology whose meticulous application is largely immune to broad market movement, while still generating consistent, substantial alpha for our client funds.
Quantitative Analysis is excellent at finding actionable opportunities in the moment. It’s also excellent at modelling future outcomes based on past conditions, were they to occur again. Prior to the emergence of Artificial Intelligence as the dominant force in science-based investment management, many managers turned to quantitative solutions to provide an edge. While some had initial success, many fell victim to the biggest deficiency of quant-only trading systems: lag. Market conditions and trading sessions may seem similar to their predecessors — and may even provide deceptively similar signals. By mistaking one for the other, the system will misinterpret dynamic shifts in the underlying assets, and trade in opposition to the outcome (often with disastrous results). The system will make these same mistakes over and over again, until enough new data have populated the model to affect a change in system behaviour; however, the lag in this process is extremely costly.
Kaiju has harnessed the power of Quantitative Analysis since our inception, and has always used QA in the capacities where it is strongest: hypothesis validation and probabilistic model authentication. By using Quantitative Analysis to identify and segment transactional behaviours into their correct market participant groups, QA delivers an essential infrastructural component of Kaiju’s investment strategies: the certainty of data integrity.
Asset movement is caused by dominant market participant behaviour in pursuit of a goal. Whether the application of this behaviour is through an algorithm, an autonomous AI trade system, or human-directed trading is irrelevant; the goals of the market participant in dominance are always met. Understand the market participant goals, and market participant behaviour becomes predictable. Identify the dominant market participant in a tradable asset, and asset direction becomes predictable. Identify a shift in dominance from one market participant to another in a tradable asset, and direction change becomes predictable. This is the power a deep understanding of Behavioural Finance represents in a strategy locus: the possibility of predictability.
At Kaiju, we do not utilise theoretical physics to find the proverbial “needle in the haystack”; the scientific application of Behavioural Finance already has done that for us. We use principles of Quantum Mechanics to determine, of all the needles we’ve found in all the haystacks we’ve searched, whether this particular needle is worth having. We do this by leveraging fundamental concepts of superposition and Quantum Darwinism to see probabilistic outcomes within a new, more accurate system of measure. Combined with the possibility of predictability that Behavioural Finance provides us, this application of Quantum Mechanics adds something to our locus: the probability of profitability.
Of all the Mechanisms of Reasoning currently employed by global fund managers, perhaps none is as ubiquitous — or as misunderstood — as AI. Although the power Artificial Intelligence represents to any strategy locus is undeniable, it often is tasked with strategy genesis. Due to the fact that context and nuance are difficult for a machine-learning system, this usually ends in failure. At Kaiju, AI provides levels of rapidity and accuracy in strategy refinement which would be impossible for a human — or even thousands of humans. While human-generated hypotheses start every new strategy development process here at Kaiju (a process that once was considered through the lens of Behavioural Finance and validated by Quantitative Analysis), it is Quantum Mechanics-informed AI that refines these strategies and elegantly develops them into their fully deployed forms. Once deployed, we use Reinforcement Learning and neural networks to continuously evolve the strategies in real-time, ensuring that obsolescence is kept at bay and that lag never enters into our field of challenges. This final Mechanism of Reasoning ties the entire locus together: the refinement of execution.
Does all this work?
Yes, it does. As an example, from February 19th, 2020, to March 23rd, 2020, the S&P 500 lost 35% of its value. During this same period, Kaiju returned 21% on allocated capital across all managed funds (3.6% on AUM), using only our signature BEX Bilateral Equity Corridor Strategy™ (“BEX™”, for short) — which is a directionally neutral strategy. Our Vol/Arb strategies during this same period returned 36% on allocated capital. Overall, Kaiju has, from the inception of each strategy using this common locus, beat the market-priced in-trade behavioural probabilities of traded assets by 10%, beat the market-priced probabilistic win rate by 11%, and returned an average of 21% per month1 on allocated capital — all while containing risk to a marginal 8% of AUM at any given time.
1Not a typo; yes, you read that correctly - per month