Rothwell Investment | Risk Management



Our key focus rule in our risk management procedure is money management.

Given the volatility of prices, Rothwell Investment does not expect that all trend signals will lead to profitable trades. Stop-losses are used in some models and managed in a proprietary manner to balance the potential loss on any trade versus the opportunity for maximum profit.

Stop-losses may not necessarily limit losses, since they become market orders upon execution; as a result, a stop-loss order may not be executed at the stop-loss price. Other models do not have any stop-loss methodology but rely on market diversification and a change in directional signals to offset risk.

Risk in some programs may also be managed by varying position size or risk levels for a market, based in part on assessment of market volatility, while other programs will maintain position sizes in markets regardless of changes in volatility. There are no systematic constraints on portfolio volatility or the maximum drawdown for any program. Volatility will not cause systematic adjustments to be made to existing positions. Some programs consider volatility in determining the size of positions initiated. Other programs do not consider volatility in determining the size of positions initiated.

Modern portfolio techniques are used in an effort to construct an overall diversified portfolio for each trading program.

However, some programs will have limited diversification because of their sector focus. These techniques will attempt to take into account the volatility and correlation of the markets that are included in the program. However, no assurances can be made that historical market correlations and diversification will occur or persist in all market conditions. In an attempt to maintain diversification, portfolio adjustments will be made to account for systematic changes identified by the firm’s research in the relationships across markets. Consistent with Rothwell Investment’s view of markets, portfolios are managed to meet longer-term risk and volatility tolerances, rather than trading on the basis of short-term trends or short-term volatility.


Capital Preservation

Rothwell Investment trading programs will frequently maintain positions even when markets have short-term volatility or when no trends exist. In these market conditions, flat or negative performance may occur because stop-loss risk management or position adjustments are not initiated by certain adverse price moves. Trading programs may take a neutral position (exit a market) rather than risk trading capital when no trend is identified. While there can be no guarantee against losses, the Rothwell Investment trading systems are designed to preserve capital and maintain an account’s positions, while waiting for profitable trending opportunities over longer periods of time. Once a trading program has identified a long-term trend, positions will be maintained, even if losses are incurred in the short-term.

While Rothwell Investment is waiting for longer-term trends to develop, significant drawdowns may take place.


Disciplined Investment Process
Rothwell Investment believes that an investment strategy can only be as successful as the discipline of the manager to adhere to its requirements in the face of market adversity. Unlike discretionary traders, who may be subject to behavioral biases, Rothwell Investment practices a disciplined investment process.

By quantifying the circumstances under which key investment decisions are made, the company’s methodology offers investors a consistent approach to markets, unaffected by judgmental bias.


Disciplined Adaptation to Changing Market Conditions

Rothwell Investment seeks to maintain a commitment to consistent portfolio construction and program integrity. The firm generally has not changed the fundamental elements of the portfolios due to short-term performance, although adjustments may be, and have been, made over time. In addition, Rothwell Investment has not changed the basic methodologies that identify signals in the markets for each program. It believes that its long-term track record has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk.

The dynamic elements of the investment process involve periodic adaptation to changing market conditions and subjective discretionary decisions on such matters as portfolio weightings, leverage, position size, effective trade execution, capacity and entry into new markets – all of which depend on professional experience and market knowledge. These changes are made as warranted by Rothwell Investment’s research findings concerning its portfolios and their performance.