Adapt to and ride trends. Do not make predictions or try picking bottoms or tops. Do not romanticize about making money in only one position or asset class. Be open to capturing trends that occur in any market, any asset class in any direction. Protect capital first, then worry about growing it. Imagine everything and prepare for anything.

We believe long-term investing success depends on obeying time-tested principles – 1) Trade with the trend; 2) Let winners ride; 3) Cut losses short; 4) Managing risk to survive through losing streaks; and 5) Maintain a positive attitude at all times.

We obey and follow these principles as necessary to survive the dangerous nature of the markets. We don’t allow frustration, impatience, anxiety or any other feelings inhibit our ability to follow them. Doing so would be a death sentence, especially in the long run.

At Melissinos Trading, our emotions support our discipline. During winning periods, greed does not derail us; neither does frustration during losing periods. Research and historical simulations and stress-testing keep us humble about the unpredictable and dangerous nature of the markets. We try very hard to maintain a long-term perspective and focus on doing the right things, not get caught up in the short-terms performance swings.

A good investing system doesn’t guarantee profits. Discipline is most important. Without it, the quality of the system doesn’t matter.

We intend to run a lean operation, focusing on generating the best possible performance for our investors over the long run. Our founder wrote about this several years ago here – Priorities of a Fund Manager.

Past Performance is Not Necessarily Indicative of Future Results

We currently observe a universe of 60+ futures markets (commodities, currencies, interest rates and stock indices) and 40+ individual stocks. 99% of the time we hold a position in each instrument, but the weighting depends on trend strength, correlation and volatility.

Trading a diverse portfolio can help decrease volatility, increase stability and smooth out long-term returns – especially during unexpected market shocks (flash crashes, terror attacks, weather-related incidents, change in government or central bank policy, etc).

We continue to expand our portfolio as AUM increases and as new markets become available (e.g. Bitcoin futures). Ultimately, we strive to monitor every liquid market on the planet so to achieve maximum diversification and capture trends currently not on our radar.

Futures Portfolio

Futures Portfolio

Equities Portfolio

Equities Portfolio

Overview:
– Long-term systematic and quantitative trend following
– Generate profits from riding major up & down trends, with no long or short bias
– Risk exposure depends on market conditions – trend strength, volatility & correlation
– Average holding period – 10 months

We use simple time-tested parameters to identify and capture price trends. We stick with persistent trends and try to stay out of sideways choppy trends that do not offer as much opportunity to profit.

Two of our articles on aligning and capturing trends: Aligning with Trends is Natural and Healthy and Everything Moves.

(The charts below show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.)

Examples of Persistent Trends

British Pound

Persistent Trends British Pound

S&P 500 Index

Persistent Trends S&P 500 Index

WTI Crude Oil

Persistent Trends Crude Oil

Examples of Sideways Trends

U.S. Dollar Index

Examples of Sideways Trends U.S. Dollar Index

Gold

Examples of Sideways Trends Gold

Soybeans

Examples of Sideways Trends Soybeans

Overview:
– Set risk limits for each position, sector and portfolio overall
– Make identical fixed fractional percentage bets on each investment
– Adjust position sizes depending on trend, correlation & volatility
– Adjust exit points depending on each market’s and stock’s trend and volatility

It all starts with making small fixed fractional bets when we enter a new position. If the market or stock proves to be a good performer, we keep it in the portfolio and possibly increase our allocation. On a daily basis, we calculate risk exposure in each position, each sector and the portfolio overall. When risk exposures breach our pre-set limits, we simply scale back position sizes.

Our risk control process adapts to market conditions. In general, we reduce risk when trend strength decreases, volatility rises and when inter-market correlation increases. To protect capital when we’re wrong, we implement protective stop-loss orders on every position we take; once placed, it adapts with the market and is continuously reducing risk.

At it’s core, our risk control process is designed to bet small amounts of capital on each investment and be ready to cut the position if and when it negatively impacts our performance.

Define Risk Budget: We bet a fixed-fraction of our equity on each trade. This makes us indifferent to any particular position. We do not play favorites or risk more on certain trades because of hunches, other peoples’ opinions or intriguing news articles.

Deploy Risk Budget: In general, we bet a very small amount of capital on each trade – typically between 0.25-0.75% of our total capital. Smaller positions are taken when market conditions are volatile and/or choppy. We increase allocations when trend strength increases and volatility subsides.

Measure Portfolio Risk: Every day, we calculate how much capital is exposed in each position, sector and the portfolio overall. We impose risk exposure thresholds to limit exposure in order to better protect capital if positions suddenly move against us.

Adjust Position Sizes: If and when risk exposure limits get breached, we simply reduce our position sizes; no hedging or any other fancy techniques. The ultimate hedge, in our view, is reducing the position or eliminating it altogether. For a real life example, see how we handled a 2013-2014 investment in Lean Hogs.

Lean Hogs