This article was first published in Investment Magazine on 9 October 2019.

Investor obsession with news was the hot button topic at Investment Magazine’s Absolute Returns conference where CFM International Inc. president Philippe Jordan warned that confusing noise with a true market signal is dangerous.

“When I wake up every morning, I have a choice to look at my P&L or to watch Bloomberg news,” one board member of the Paris-based quantitative hedge fund manager told the audience. “But at the end of the day, understanding noise doesn’t affect our portfolio all that much. Over time I’ve learned to live with tails since they are too difficult to forecast.”

Jordan said people need to find meaning in what they observe so being plugged into the overnight news and discovering what other investors think helps create a narrative. While emotions play a role in decision-making, Jordan said long-term capital allocators must think carefully about what risk they are prepared to take.

“We own a portfolio of risk that tends to be uncorrelated and we are happy with that,” he said. “That’s not to say that extracting meaning from signals is bad, but you need a framework to discriminate between the noise and the actual signal.”

Jordan says he prefers to explore the predictability in financial markets through data. He joined the hedge fund, which was developed by scientists, in 2005.

He said machine learning was becoming increasingly sophisticated, especially in response to investor briefings and quarterly announcements. “When you collate all that data you can find new insights about say, the changing nature of banking or credit slowing down.”

He acknowledged the value of expert groups where investors can get new insights from analysts, investment and chief executives. “It’s not new, people have been doing it for the last seven or eight years, but it has evolved rapidly.”

So, what should managers do when the market is down for six weeks in a row, the news is bad, and the trustee board is worried about signals that could lead to contagion? Jordan said an investment chief needs to understand that sometimes what they’re looking at is “not so important, that it’s noise”.

“Ask a group of people to make a life changing decision under pressure is asking for trouble,” he warned. “You won’t get good outcomes if 13 people make a decision under the gun that will have massive effects on their portfolio.”

Jordan said market infrastructure risk or a banking failing were the only caveat where “different types of decisions” needs to be made.

The hedge fund manager also discussed what happens when structural changes in the markets occur such as interest rate coupons turning negative. “If we observe a big change in market, we will pay attention but not through a narrative – not through an inference mechanism,” he said. “We would use data to reduce risk where alpha decay is present.”

Please enter your details below. The ISTrends Fund Fact Sheet will be sent to your nominated email address


* Required
CAPITAL FUND MANAGEMENT LLP (CFM)
The products, information and other material contained on this website are only directed at investment professionals in Australia. Please note that you will be prevented from purchasing or dealing if you are not eligible for products and services offered within this site. Materials contained within this website have been made available for information purposes only. It does not contain any investment recommendations nor provide investment advice. Neither CFM nor its related entities, directors or officers guarantee the performance of, or the the repayment of capital or income invested. Past performance is not necessarily indicative of future performance. Pursuant to ASIC Class Order 03/1099, CFM LLP, the Investment Manager of the Fund, is exempt from the requirement to hold an AFSL under the Corporations Act. CFM LLP is regulated by the UK Financial Conduct Authority ("FCA") under United Kingdom laws which differ from Australian laws. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. The information on this website has been prepared on this basis and is for the use of wholesale clients only. It is in no way intended for use by retail clients and should not be distributed to or relied upon by a retail client.
TERMS & CONDITIONS
What is a financial services licensee? A person or entity is a financial services licensee if they hold an Australia financial services licence issued pursuant to the Corporations Act 2001
BY CLICKING ON 'I AGREE', I DECLARE I AM A FINANCIAL SERVICES LICENSEE AS DEFINED IN THE CORPORATION ACT 2001.