Finance is my passion and I am fortunate to have it as my profession. Even after some 25 years in the industry, investing money still is the most exciting thing I can think of doing as a profession.
In order to succeed in investing, one needs to have an edge. Whatever your edge is, it is always under threat and it only lasts for a moment in time.
This is because any advantage acquired by an edge will attract competition fast. After your edge becomes common knowledge there is no profit to be made anymore and actually neither is there an edge.
The race in the late 1990s
During my career, I have seen my first special skill as a sales trader become worthless as computers and algorithms replaced humans in this function.
I will illustrate the skill I had in this example:
Buy these 32 different stocks in these European markets “over the day, max 1/3 of volume, with volume-weighted average price target (VWAP), happy to own -6% from yesterday’s close“
Today you can automate this trade command on a computer before the market opens and it will perform the whole procedure.
It was clear already in the mid-’90s that automation will replace humans in many functions. However, there were many years to earn profits with this edge, before new competition crowded this specific race. Now sales traders have lost their jobs to algorithms.
The race in the new millennium 2000s
The next track where there was room to make profits was securities analysis. Instead of just looking at stocks and bonds, I looked into all investable objects in parallel and compared their risk and return characteristics.
Together with my first HCP crewmate and co-founder Jarno Lämsä we built two programs named Sijoitusmoottori (Finnish for investment engine) in 2009. We were partly financed by “TEKES” funding from the Ministry of Economic Affairs.
The idea we developed is still at the very core of my investment strategy in the HCP Black fund. For the first eight years, HCP got its bread and butter from this specific style of investing before expanding to parallel races within the field of investing.
The race in the 2010s
There is no slowing down on research and development when one aims to hold an edge.
Our team did some burdensome manual analysis of corporations in the early 2010s that was almost undoable as it was so human resource-intensive. Today the same study can be done by a computer and database. As in the late ’90s sales traders lost their edge to algorithms, now computers and databases have replaced humans in this calculus.
In our HCP Focus fund, we started using one specific database to replace manual analysis in 2015. Using this tool instead of manual analysis is the most important source of Focus fund’s alpha ever since. For the last five years, we have gotten our bread, butter and even some cheese from this specific investment analysis.
So what competitive sport is this really?
Finance as a sport might sound unfair as any practitioner can expect their skillsets to be cannibalized sooner or later. But the never-ending race goes on and professionals will continue to look for new tracks to make profits in.
The understanding and knowledge acquired by holding a certain edge in the past are not for nothing though. Only due to my work on artificial intelligence (AI) in the mid 90’s I have developed a mature understanding of what computers can do in finance. This expertise allows me to currently have 26 % of assets invested in trend-following strategies in the HCP Black fund, which is partially based on machine learning.
Also, the expertise that our team acquired by doing a burdensome analysis of corporations manually, made it possible for us to evaluate different databases on their accuracy. We had high-quality benchmarks of the calculus done by ourselves to compare the computer calculus with. This allowed us to make a well-informed decision when choosing the database used in the Focus fund.
We live with the well-known market wisdom “Enjoy as long as it lasts – it never does” and work on research and development constantly. That is the way to constantly have the edge as a team. What all we are working on right now, I will tell you later, and it is that way for a reason.
Just yesterday we published our research on “risk parity” which type of investments we are not currently involved with for a reason.