What is it about the casino business that makes it so profitable? How does it make its money?
Casinos rely on slight skews (in their favor) of chance occurrences. In the case of roulette it is 1 in 37. But for the math to work, one essential condition must be in place - a quantity of bets large enough for the law of big numbers to bear fruit.
The Fund, whose returns are represented on the chart below, operates on similar principles. More than 1,000 positions in stocks are opened and closed each week. In one year the Fund executes about 70,000 (seventy thousand!) trades. This quantity is sufficient to put the law of big numbers to work and to smooth fluctuations in performance to such an extent that the volatility of the Fund is similar to that of high yields bonds. It's a great example of a statistical arbitrage strategy.
As the chart above shows, the Fund has behaved steadily in a number of different market conditions. Concerns of inherent risk within the strategy seem minimal - an extreme level of diversification and net equity exposure neutrality assure stability. Significant leverage employed, however, raises possible concerns. The quality of operational control requires acute attention. For this we look first at the management team and its organization.
Four partners, three of them CIOs and one CRO, closely manage on a daily basis all executed trades and exposures. The remainder of the team consists of quantitative analysts and traders adhering to an interaction process that has been well established over many years. The result is a management company with institutional quality operational controls.
Curiously, the founders have unusual backgrounds for investment management. One of them was one of the most celebrated players in the history of "Magic: The Gathering", the first trading card game created, holding records for the top 8 appearances and for lifetime winnings. He was both the 2000 U.S. National and World Champion, and captained the US Team, which won the team world championships that year. Another Partner co-managed the largest blackjack card counting team in the United States, forcing some casinos to share a part of their revenue. These previous experiences helped create the management company's distinctive investment philosophy and winning corporate culture.
In late 1990s Courant entered the investment business applying a similar style of quantitative strategies. While we experienced some success, it should be acknowledged that this Fund has excelled significantly in the strategy. The founders are now champions of this financial arena.
The strategy remains at the cutting edge of IT, extracting profits by analyzing Internet media streams to take advantage of a favorable probability skew found in big data analysis. A characteristic portfolio holds about 1400 different equities. Single positions do not exceed 2% of the capital, allowing for a high level of diversification that generally liberates the Fund from the moods of mister market.
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