“Great things are done by a series of small things brought together.”

-Vincent Van Gough

Since the publication of the Efficient Market Hypothesis in 1965, the academic and investment worlds have coalesced to the opinion that making excess profits (“beating the market”) through market timing is very hard and almost impossible after costs are considered.

Connected to this, there is a pervasive idea that successful investment strategies are based on secrecy. And, superficially, this seems like it must be true. If profitable strategies were public, everyone would start doing them and the competition would extinguish the edge. But the idea isn’t correct. Here are several reasons and rationales as to why secrecy isn’t as important as you may think:

• Every industry has “secrets” but equally every industry has a lot more that is shared knowledge. There are college courses, textbooks and conferences specifically designed to share knowledge. The finance industry is no different.
• People move from firm to firm, taking their knowledge with them. Software can be protected by IP laws, but what is inside someone’s head can’t. Some of the largest and best financial firms do practically no formal training of their own, relying instead on what employees have been taught elsewhere.
• Outsiders might think that what distinguishes firms is their models. But most of the real work is in data cleaning, managing software stacks, negotiating clearing rates and HR management (It is like the army where most soldiers aren’t holding guns but supporting those who do). These roles are all crucial. It is the difference between a professional operation, and what a retail investor can do. It is possible to build a car in your garage, but it is also much easier to buy one.

I won’t go as far as to say all investing modelling knowledge is commoditized, but a lot of it is.

One reason that many investors doubt this is that they are wildly optimistic. They think successful firms must have discovered a huge edge, equivalent to a coin flip that wins 55% of the time.

But huge edges don’t exist. And the fact they aren’t found doesn’t mean that they are hard to find. On the contrary, if they existed, they would be quickly found and would be traded out of existence. But it also isn’t necessary to have a huge edge to win. A lot of small edges can be traded together and give the same results.

Hull Tactical acknowledges this, and instead of having one signal, we combine over 30 signals. All signals are based on work in published academic papers. We’ve made a few tweaks, but the core ideas are in the public domain. This is a good thing. It shows that these things have been tested by more people than just us.

It is tempting to dismiss academic research as being useless for practical investing. There is a tiny bit of truth in this, but it misses the point. Academic papers aren’t meant to give practical strategies any more than investment strategies would make interesting academic papers. But academic work is a great source of ideas. And the predictive variables that are studied will fit into a larger academic research paradigm. So, one paper will lead you to a host of ideas that you can test, evaluate, and fit into your composite model. Getting actionable information from academic studies is a skill, but a very useful one. It is far more efficient to build on existing knowledge than it is to start from nothing.

This post is the first in a series where we will discuss the signals that go into our market timing model. This strategy is deployed in an exchange traded fund that HTAA serves as the adviser to, Hull Tactical US ETF (Ticker: HTUS). It is up to the reader to decide if they trust the signals and then whether to attempt this themselves or to invest in the Fund at the expense of the management fee (less than 1%) to have it already completed and traded for them.

First up will be the turn-of-the-month effect.

Disclaimer

HTAA, LLC serves as the investment advisor to the fund. The Fund is distributed by Northern Lights Distributors, LLC., which is not affiliated with HTAA, LLC or any of its affiliates. HTAA is not affiliated with Ultimus Fund Solutions, LLC or any of its affiliates.

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s prospectus, which may be obtained by visiting www.hulltacticalfunds.com. Read the prospectus carefully before investing.

Investing involves risk, including the possible loss of principal. Investments in smaller companies typically exhibit higher volatility. The Fund will invest in (and short) exchange-traded funds (ETFs). The Fund will be subject to the risks associated with such vehicles. The Fund may also invest in leveraged and inverse ETFs. Inverse and leveraged ETFs are designed to achieve their objectives for a single day only. For periods longer than a single day, leveraged or inverse ETFs will lose money when the performance of the underlying index is flat over time, and it is possible that a leveraged or inverse ETF will lose money over time even if the level of the underlying index rises or, in the case of an inverse ETF, falls In addition, shareholders indirectly bear fees and expenses charged by the underlying ETFs, as well as the Fund’s direct fees and expenses. The Fund may invest in derivatives, including futures contracts, which are often more volatile than other investments and may magnify the Fund’s gains or losses.

The Fund is an actively managed ETF and, thus, does not seek to replicate the performance of a specified passive index of securities.

The Fund may take short positions. The loss on a short sale is theoretically unlimited. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund.

There is no guarantee that any investment strategy will produce positive results. There is no guarantee that distributions will be made.