Investor obsession with news was the hot button topic at Investment Magazine’s Absolute Returns conference where CFM International 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,” the head 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 thinks 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 is 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.”