Introducing Sunrise Capital Partners
By: Jason Gerlach, CEO and Managing Partner, Sunrise Capital Partners LLC, the sub-advisor to the AdvisorShares Sunrise Global Multi-Strategy ETF (MULT)*
Greetings AlphaBaskets readers. We are Sunrise Capital Partners. Now in our 35th year in the asset management business, we are thrilled to be joining the AdvisorShares platform and looking forward to the opportunity to bring our time-forged investment expertise to the rapidly-expanding universe of ETF investors.
While our product on the AdvisorShares platform has not yet launched, we thought we would introduce ourselves to AlphaBaskets readers and provide some detail as to how we think about investing. Overall, our investment philosophy centers around a set of five principles that have not wavered since we opened our first investment account back in the 1970’s.
First, we believe that markets are inefficient and as a result, routinely exhibit price patterns that, invested in properly, deliver compelling risk-adjusted returns over time that are agnostic to the factors that drive the success of most other investment strategies.
When we began investing on behalf of our clients over three decades ago, we were certain about only one thing: the uncertainty of global markets. As a result, we were amazed by the confidence, and often boldness, with which investment “experts” would offer predictions about future outcomes. Whether investors were being told that stock X was a “must buy” because it “could only go up” or a manager was declaring that the U.S. government was “certain” to do Y and that as a result, the “no brainer” move was to buy treasuries, we were simply baffled by the audacity of anyone’s proclaimed ability to not only predict the financial markets’ future but more incredibly, convince investors to follow those predictions with their hard-earned money.
We were then (and still are) scientists, statisticians, and computer programmers who demand proof and not simply some expert’s word that something would or would not happen in the future. We were convinced that no one person could possibly synthesize the numerous variables that drive market behavior and based upon that, successfully make market calls with even close to the 100% confidence with which people often state their market views. Thus, we had no interest in offering investors yet another “crystal ball” approach to investing. Instead, we wanted to look very closely at the reams of raw data generated by markets, study that data, and determine what, if any, lessons that data taught us about how markets tend to behave. If there were statistically significant patterns that emerged from that behavior, our view was that those would be much more rational bases for investment decisions than the bold predictions of any one investment “expert.”
What we discovered way back then and what we have continued to uncover in the ensuing decades is that while future market behavior cannot be precisely predicted, global markets have many statistically significant tendencies that if invested in properly, can yield compelling risk-adjusted returns over the long term. Far from “knowing” exactly what the markets will do, we instead have built a framework of analysis in which we embrace the overall uncertainty of markets and simply make investments based on what is statistically likely to happen based on how markets have behaved previously in the same or similar scenarios. We’re fully cognizant of the fact that many of investments will be unprofitable but we take comfort in the knowledge that if our statistical analyses are correct, many of our investments will be profitable and that over the long term, profits earned on those investments will outweigh losses on our unprofitable investments. Nearly 35 years in, our investment approach has proven successful so far.
Second, we believe that a highly disciplined, systematic approach to market entries, position sizes, and market exits is essential to maximizing investment profits, minimizing investment losses, and providing investors with the best possible risk-adjusted returns.
The variable that most often leads to investment mistakes is human emotion. Whether it is fear, greed, hubris or otherwise, the beginning-of-the-end for most investment strategies is when a person begins to think they are smarter than the markets they are investing in and acts accordingly. For this reason, for three decades Sunrise has followed a systematic approach to investing in which investment decisions are made by emotionless models that coldly assess market data and tell us whether we should be long, short or out of a market entirely. When we make an investment, we have no personal attachment to it whatsoever and we never “fall in love” with any single investment. If the outcome a particular investment seeks fails to materialize, it is stopped out so that capital is preserved for future opportunities. If a desired outcome materializes, the investment is typically taken “off the table” at a pre-set profit target based upon a variety of statistical measures. While there are moments when “sticking to the system” can be gut-wrenching, our long-term track record proves that over time, science and statistics trump “gut” feelings and emotional investment decisions.
Third, we believe that diversification by sector, market, time frame, investment technique, and market behavior assumptions are critical to effective, long-term investing with tolerable volatility.
As the old saying goes, “diversification is the only thing the market gives you for free.” At that price, it is Sunrise’s view that one can never get enough diversification. Since our inception therefore, we have always looked broadly and tried to apply our investment approaches across as many sectors, markets and geographies as possible as we, like any investor, can never be certain as to where the next opportunity might arise.
However our thirst for diversification does not end there. As we’ve seen over the past three decades, sometimes sector, market and geographical diversification is not enough. Global crises and other events can spike correlations and a “risk on/risk off” environment can significantly harm even portfolios that appear to be fully diversified. For this reason, we also add three more levels of diversification to our investment approach – time frame, technique and market behavior assumption. Specifically, investment strategies that are looking at market behavior over the past several weeks will often achieve much different outcomes than those that look at market behavior over the past year. Likewise, investment approaches that are looking for patterns of market momentum will often provide a much different return stream than those that are looking for patterns in which prices revert back to some kind of mean price measure. Finally, an investment approach that assumes that prices will follow a “normal” or “gaussian” distribution of outcomes will behave far differently than one that assumes prices will follow an “abnormal” or “fat tail” distribution of outcomes.
Fourth, we believe that the continual review of investment methodology, questioning of assumptions, and adaptation to market dynamics hold paramount importance to long-term alpha generation and successful investing.
In our view, one must have humility in the face of ever-changing and ultimately unpredictable market behavior and never assume that you’ve “figured it out” or that your investment approach is completely “perfected.” Thus for nearly 35 years, we have engaged in a never-ending cycle of research and development in which we carefully study the results of our investing, question the reasons why we think those results were achieved, and test new theories of investing constantly in the search for even better risk-adjusted returns for our investors. Markets evolve, economies change, and technology improves and thus we view every minute that Sunrise stands still as a minute in which we are potentially falling behind. We could not have survived the investment business for three decades without an ongoing commitment to getting better and improving every aspect of our investment process as opportunities arose to do so. After all, working tirelessly at continual innovation is the absolute least we can do in the quest to achieve compelling risk-adjusted returns on the hard-earned money of our loyal investors.
Fifth and finally, we believe that no single investment approach is adequate and that instead, the best approach is thoughtful and dynamic blend of multiple approaches in which different components account for the weaknesses of other components and collectively generate a better risk/adjusted return.
Markets are complex and continually evolving. What generates profits in them on one day may fail completely on another day. Thus in our view, the key to successful investing is bringing together disparate investment approaches in way that they will complement each other, account for each other’s weaknesses, and blend in a way that will provide our investors with a compelling downside protection and a relatively smooth, positively skewed return profile over the long term.
At Sunrise, we take these principles seriously and apply them every single day in our business. Every one of them plays a role in our investment strategies and every one of them is in our view crucial to the success that our business has had the fortune of achieving so far. In the coming months and years, we look forward to discussing here in AlphaBaskets the findings achieved by these investment principles and our ongoing efforts to provide our investors with competitive solutions regardless of the market environment.
*Effective but not available for sale at this time.