Stop Loss May Not Stop Losses

Losers often do bounce back, and catching the bounce requires holding on to the right positions. The desire to "clear out" losers can lead to over selling. Managing the tendency to over-sell can add significantly to a fund's performance.

Cabot is working with a multi-billion dollar Mid-Cap, Growth Fund that has beaten its benchmark on average by 120 basis points, for the past 3 years; and achieved an impressive 40 basis points of alpha (risk-adjusted return) for the same time period. The fund's strategy is completely quantitative; turnover is 1.4 times per year for an average holding period of 8 months. Buried within the fund's strong performance is The ineffective selling of certain losers. In particular, this manager is pushing out low-volatility losers too quickly, foregoing 40 basis points of annual alpha.

Now implementing a Cabot behavioral shift, this manager is being prompted daily to consider holding on to losers experiencing low volatility if they have been held for less than 7 months. By consistently acting on the daily recommendations supporting this shift, the manager can add approximately xxx bps in return and 40 bps in alpha annually. The benefits from this shift are highly predictive based on excellent statistical findings from the "Out-of-Sample Testing" (P-Value <0.5%)