SPECIAL REPORT: THE BAHAMAS 2023 – Part One
ENTER
SPECIAL REPORT: THE BAHAMAS
CONTENTS
Intro • Features • Videos
The pillars of innovation
Paul Winder of Deltec Bank & Trust Limited, lays out the five foundational elements that drive innovation, and explains why they're needed to face today's problems
a preeminent jurisdiction for wealth management
Dinesh Menon of Higgs & Johnson explains what sets The Bahamas apart from other offshore and onshore locations and what it offers wealth managers and creators
systematic trading overrides bad decision making
Dr Iyandra Smith Bryan of Quantfury Trading Ltd discusses how sophisticated trading software is saving human traders in The Bahamas and elsewhere from their own dark urges and frailties
Investment strategies through systemic research
Carl Illing of ActivTrades explores how technology has changed the way businesses operate and advises on how traders can deal with a world still in crisis mode
CEO MESSAGE
Dr Tanya McCartney, CEO and Executive Director of The BFSB discusses what financial services can expect in the juristiction over the next 12 months
Foreword
International Investment Publisher Gary Robinson introduces this Bahamas mini ezine
Interviews
All five video interviews from this mini ezine, with insights from Dr Tanya McCartney of the BFSB, Deltec, Quantfury Trading, ActiveTrades and Higgs and Johnson
Gary Robinson, Publisher of International Investment, highlights that while sometimes the best things come in small packages, the most diminutive can also pack a significant punch and stand out against larger counterparts...
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s the world has endured this seemingly endless period of limbo and restricted international travel, there has been no
foreword
This first 'mini' ezine features four informative features and has a total of five videos, including an excellent interview with BFSB's Dr Tanya McCartney introducing this mini ezine and discussing some of the acheivements and, indeed, challenges of the last 12 months. It was fantastic to once again visit the Caribbean's finest archipelago and conduct most of these interviews face to face, and it was particularly pleasing to be able to personally present Dr Tanya Tanya McCartney with the International Investment Contribution to Diversity and Inclusion Award 2022-23. In this mini ezine we have an excellent feature submitted by Higgs and Johnson entitled: The Bahamas: A Preeminent Jurisdiction for your Wealth Management & Structuring Plans. Here they discuss the varied range of options that the jurisdiction has to enable wealth creators to put in place robust, flexible and resilient wealth management structures as part of their wider planning strategies. Carl Illing of ActivTrades explores how technology has changed the way businesses operate and advises on how traders can deal with a world still in 'crisis mode'.
ello and welcome to the latest International Investment ezine, one of two mini ezines – created in association with The Bahamas Financial Services Board – that will ultimately form the 2023 Special Report on The Bahamas.
Dr Iyandra Smith Bryan of Quantfury Trading Limited discusses how sophisticated trading software is saving human traders in The Bahamas and elsewhere from their own "dark urges and frailties". The features from Deltec, Quantfury Trading and ActiveTrades have exclusive video interviews with their authors and rounding off the videos, Higgs and Johnson brings us an interview with Senior Associate Keith Major, who discusses aviation in The Bahamas, recent achievements in the industry, and why there's 'always room at the top'. Enjoy part one and be sure to tune in for part two when it is released next month. Best Regards. Gary Robinson, Publisher, International Investment
At the height of the emergence of digital transformation, tokens have emerged allowing entrepreneurs to receive capital easily, quickly, and efficiently
Small is beautiful
It was particularly pleasing to be able to personally present Dr Tanya McCartney win the richly-deserved International Investment Awards winner's trophy for Contribution to Diversity and Inclusion Award 2022-23
Dr Tanya McCartney, CEO and Executive Director of The Bahamas Financial Services Board dicusses what financial services can expect in the juristiction over the next 12 months
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CEO Message
CEO message
Paul Winder, fiduciary services at Deltec Bank & Trust Limited, lays out the five foundational elements that drive innovation, and explains why they're needed to face today's problems
However, more often than not, innovation simply comes in the form of a new process or mode of thought; a more efficient way of doing something, an approach for streamlining business practices or a tool to enhance and achieve a goal. Innovation stems from the world around us, as global citizens draw upon their lived experiences, surroundings and networks. At its core, innovation can be broken down into five foundational elements: passion, leadership, collaboration, mobility, and humility. We will explore each element to uncover its role in driving innovation and the respective business implications today and in the future.
he word ‘innovation’ often calls to mind the technical and the complex. We think of new industrial or biomedical revolutions, such as reusable rockets or antibiotics, or ground-breaking consumer products, such as smartphones.
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Good ideas come from the petri dish of many other ideas. Incomplete ideas tend to have grains of brilliance but suffer in their remaining aspects and fail to reach fruition but offer a starting point for others
Wendy Warren is Managing Director at Caystone Solutions. You can email her at contact@caystone.com
World-leading companies have shown us that revolutionary ideas, the ideas that make the other attempts worth it, require constructive feedback from all departments within a global corporate culture that encourages failure
The next step in the innovation ecosystem is collaboration, the act of coming together, connecting and ideating on a joint project. In an innovative company, leading executives support the ideas best addressing client needs, both now and in the future. They avoid stifling or constraining thinking, understanding that their role is to create an inspirational environment that nurtures innovative thought. The United States’ Defense Advanced Research Projects Agency follows what it calls the 'Heilmeier Catechism' to evaluate proposed ideas. Self-assessments provide inherent structure, allowing the team to assess risk and define their targets, immediate and long-term needs, costs and overall benefits. By focusing on clients first, we receive ideas that drive cost-effective growth. Multibillion materials science company W.L. Gore asks explicitly about the customer needs and new products will answer. Then, various stakeholders chime in and judge the merits of proposed ideas, with successful ventures circulating across all the company's departments. The third step to innovating is to define the client-centric structure, and with it, require discipline. Discipline fans the flame and brings diverse teams together to celebrate their collective enterprise within a culture that explicitly rewards the group while honouring the initial inventor. Effective government agencies or billion-dollar companies follow this model.
Today, innovative ideas are needed more than ever as the world faces unprecedented social and environmental challenges. However, these ideas need to be transformed into concrete action, which require a leap of faith. The Googles, Amazons and Microsofts of the world could not exist without the commitment, faith, and continued passion of their entrepreneurial leaders. For over 75 years, Deltec Bank & Trust Limited has been a champion of innovators, entrepreneurs, and nomads. Our commitment to the global innovation ecosystem is built on a belief in embracing calculated risks, investing in bold thinkers in order to help bring their ideas to life. With tailored financial services that cater to highly demanding, rapidly scaling, complex and innovative entrepreneurs and their respective ventures with prudence and sound risk management, Deltec hopes to usher in a new era of innovation aimed at tackling some of the world’s biggest challenges.
1. mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/the-eight-essentials-of-innovation
References:
2. innovationmanagement.se/2009/05/08/the-people-focus-in-innovation/
3. digitalcxo.com/article/the-people-part-of-the-innovation-equation
4. www.fastcompany.com/90847467/most-innovative-companies-finance-2023
5. www.entrepreneur.com/leadership/11-proven-habits-of-highly-innovative-people/313733
6. www.businessinsider.com/sam-altman-chatgpt-openai-ceo-career-net-worth
7. www.washingtonpost.com/brand-studio/wp/2021/05/24/feature/how-better-collaboration-can-boost-innovation-and-success-in-the-new-normal/
8. hbr.org/2022/10/4-types-of-innovators-every-organization-needs
9. qmarkets.net/resources/article/4-innovation-culture-best-practices-from-the-worlds-most-successful-companies/
Turning ideas into action
Innovation demands an almost complete reverse order of how corporate hierarchy operates. Therefore, it also demands humility. Top executives should serve to create the structure and the environment conducive to idea generation, refinement, and implementation by their employees. This is the other side of the coin to the generally accepted practice of promoting stock ownership among employees and giving them a reason to care. World-leading companies have shown us that revolutionary ideas, the ideas that make the other attempts worth it, require constructive feedback from all departments within a global corporate culture that encourages failure. It's the sincere trying that matters, in addition to, or perhaps much more than, the results. Among today’s leaders, W.L. Gore and BMC Software encourage employees to fail, which ironically indicates their leadership. Failing means that innovation is happening, and that employees feel unafraid to submit their ideas. Because sparks are flying like a reusable rocket's factory floor, a great idea is all the more likely to land.
Pillar 5: Humility
Companies across industries oscillate between ideation, refinement, and implementation. When new ideas and potential new revenue streams become essential to operations, companies are in the ideation phase. When ideas surface, whether organically or through strategic acquisitions, they must be refined. Finally, implementation of the ideas. The overall need and life cycle of the firm dictates the relative importance of each. A heavily saturated market desperately in need of new technology or innovation for further growth prompts ideation. Phones before Apple's iPhone were an example of an existing technology in need of a refresher. Refinement refers to the improvement of an existing idea, product, or both. Similar to the continuous improvements of Apple's products today, it scans for areas to improve to increase brand power and customer loyalty. Implementation refers not only to the doing, but to the timing. Effective implementation calls for militaristic thinking. The task here remains to define who the best team members are for bringing the idea to fruition, and then to scale. The fourth step to innovating is to know your team – treat them like individuals with unique passions, likely expanding beyond contract objectives. We will find that some are highly adept at generating ideas, others at viewing ideas from different angles, and others at seeing them come to life.
Pillar 4: Mobility
Pillar 3: Collaboration
The primary element driving innovation throughout centuries is passion. Also referred to as 'intrinsic motivation’, this is the rare spark of doing the work for enjoyment's sake. From timeless works of art, to elite sport and engineering masterpieces, passion is at the core, driving inherent satisfaction and joy. Psychologist Teresa Amabile discovered that the explicit expectation of judgement as part of a greater reward effectively killed creativity. It destroyed innovation in its tracks, while a lack of judgement inspired creativity. Embracing passion and affording it the space to grow and spark creative thinking naturally allows for bold, innovative thoughts and actions. This feels counterintuitive but is in fact logical at its core. Those who anticipate or allow space for intrusive thoughts and negative feedback are often prevented from exploring the full depths of their creativity and do not innovate. Instead, they cater to what evaluators might perceive as ‘good’ and lose their passion and concern for the project beyond the immediate, external reward. The first step to innovating is to find a purpose. Professionals who spot the whitespace, the problems to be fixed, the new frontiers to explore and opportunities to engage with are few and far between. For that exact reason, this rare group of individuals are in high demand.
Pillar 1: Passion
Pillar 2: Leadership
Good leadership inspires and nurtures innovation, facilitates growth and rewards strategic and creative thinking. Good leadership not only produces a robust culture but also cultivates the leaders of tomorrow. The immediate impulse may be to consider ideas that do not meet the threshold of a “great idea” and terminate these ideas before they are fully realized. However, this only reflects decades of poor culture management and a failure to understand innovation. More often than not, failure breeds success, ushering the next idea, or prompting the evolution of an existing concept. Good ideas come from the petri dish of many other ideas, either incomplete or already in place. Incomplete ideas tend to have grains of brilliance but suffer in their remaining aspects and fail to reach fruition but offer a starting point for others. Amazon presented a model to follow. It established the 'PR/FAQ' format – a press release outlining a product's intended vision at launch and a FAQ explaining the customer benefit. These employee- submitted ideas then receive evaluation and circulate amongst other innovators. The collective process distributes rewards and recognition instead of one individual out of many but honours the first idea generator.
Fear keeps you from making as much money as you ought to
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Good ideas come from the petri dish of many other ideas, either incomplete or already in place
Dinesh Menon of Higgs & Johnson explains what sets The Bahamas apart from other offshore and onshore locations and what it offers wealth managers and wealth creators
The Bahamas: A preeminent jurisdiction for your wealth management and structuring plans
The first trust company established in The Bahamas in 1936 was The Bahamas General Trust Company Ltd, which is now known as Société Générale Private Banking (Bahamas) Ltd. Eighty-seven years later, The Bahamas continues to be widely regarded as a leader in trusts and wealth management solutions. Many of the world’s renowned financial institutions have well-established presence in The Bahamas, taking advantage of the country’s stable political and economic systems, reliable business infrastructures, a legal profession and judiciary that are very familiar with complex issues relating to wealth management structures, and critical proximity to key markets in North and Latin America.
he Bahamas is a sovereign archipelagic nation of 700 islands and cays located off the coast of Florida, US. It was a former British colony, attaining independence in 1973 while still remaining a member of the British Commonwealth.
The wealth management industry in The Bahamas has evolved to provide wealth creators with the types of features and solutions they would find especially beneficial
A perpetuity period is the period that defines the life span of a trust and in which the income of the trust may accumulate. Prior to 30 December 2011, all Bahamian trusts had a perpetuity period that was either incorporated into the trust instrument, or if not incorporated, was prescribed by statute. This mandatory period was a product of the long-standing “rule against perpetuities” that prohibited trusts of excessive duration. The Bahamas abolished this rule and consequently trusts created on or after 30 December 2011 can last indefinitely. This allows for the creation of dynastic trusts and avoids expensive and time-consuming restructuring exercises when a trust approaches the end of its perpetuity period.
What sets The Bahamas apart
While The Bahamas has robust rules in place to enhance the integrity and resilience of its financial industry, it has managed to deftly strike a balance between regulation and preserving privacy and confidentiality for genuine reasons. Bahamian trustees are not required to routinely disclose or file trust documents, details of the trusts they administer and personal particulars of trust-related parties, provided they take all necessary steps to ensure the structures they administer do not facilitate criminal conduct and are fully compliant with world-standard regulations that are regularly updated. Additionally, trustees in The Bahamas need not disclose trust documents to any person without a vested interest, but they are obliged to take reasonable steps to ensure at least one person who can enforce the trust is aware of its existence. This strikes a sensible balance between ensuring the trustee is held to account by at least one person who can enforce the trust and preserving privacy and confidentiality.
Wealth creators may also be interested to note that there are no income, capital gains, wealth or estate taxes in The Bahamas
Examples include Argentina, Brazil, Mexico, Kuwait, Spain, Italy, Saudi Arabia, among others.
Feature
Key developments and latest trends in the fintech sector in The Bahamas
Keith Major, Senior Associate at Higgs & Johnson, discusses the current state of aviation in The Bahamas, recent achievements in the industry, and why there's 'always room at the top'
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The wealth management industry in The Bahamas has evolved to provide wealth creators with the types of features and solutions they would find especially beneficial. A) The following is a summary of such useful features of a Bahamian trust:
It is not unusual under modern trusts for a settlor/grantor or a trusted member of the settlor’s circle to reserve certain powers to him/herself, like powers of investment or to provide investment directions. Most trust-friendly jurisdictions will support such trusts; however, only a few jurisdictions specifically allow for this under their statute. Section 3 of the Trustee Act, 1998, expressly provides for the reserving of powers under a trust. This allows wealth creators to establish carefully tailored wealth management structures without losing total control over how the assets are managed and enhanced.
1) Reserved powers
2) Disclosure and confidentiality
3) Trust period
Foundations have been widely used for close to 100 years in Europe and Latin America, hence their greater familiarity to clients from those regions. They serve as effective tools for tax, asset protection and estate planning, organising corporate ownership, assisting charities, and the ownership of PTCs, to name a few. With the Foundation Act 2004, The Bahamas became the first common law jurisdiction to introduce foundations’ legislation, providing wealth creators with another vehicle to develop their wealth management structures. A Bahamas private foundation is the common law equivalent of the civil law foundation. Unlike a trust, a private foundation has a distinct legal entity; however, like a Bahamian trust, a founder may reserve certain powers and the foundation is not subject to a perpetuity period. Assets placed within a foundation are owned solely by that foundation and a change in the foundation’s governing body does not affect the legal ownership of its assets.
3) Private foundation
The concept of forced heirship refers to particular testamentary laws of certain countries that limit an individual’s freedom of testation by stipulating how that person may dispose of his or her assets upon death. In such countries, the deceased’s heirs have a right to claim a portion of that partible inheritance. These forced heirs are persons, usually children and spouse, whom the testator cannot exclude from inheritance due the prescribed portion of the estate they are each entitled to under law. Such rules undermine a person’s freedom to implement a carefully customised succession plan for his/her wealth. In The Bahamas, the combined effect of Sections 7(2)(a) and 9 of the Trusts (Choice of Governing Law) Act, 1989, as amended, and Section 79A of the Trustee Act, 1998, ensure that heirs from forced-heirship jurisdictions would not have a claim against a Bahamian inter vivos trust or its assets, unless the settlor intended for them to be beneficiaries of such a trust.
4) Anti-forced heirship
To protect legitimate creditor claims, the Bahamas Supreme Court has jurisdiction under the Fraudulent Dispositions Act, 1991 (FDA) to adjudicate whether a disposition of assets constitutes a fraud on a particular creditor who has brought an action. If the court finds that the assets were fraudulently transferred, it can set the disposition aside, but only to the extent necessary to meet the claims of that creditor. However, wealth creators may be interested to note that there is no jurisdiction under the FDA to invalidate a trust in its entirety, and under Section 4(3) of the FDA, a claimant needs to commence proceedings within two years of the date of the asset’s disposition/transfer.
5) Firewall / asset-protection features
B) The following is a summary of a range of other Bahamian wealth management vehicles that are available to wealth creators to use on their own or in conjunction with their trust:
Wealth creators may also be interested to note that there are no income, capital gains, wealth or estate taxes in The Bahamas. The Trustee Act, 1998, exempts trusts for non-resident beneficiaries specifically from taxation. The only exceptions to this are a small nominal fee, called a Trust Duty, that needs to be paid at the time a trust is created and a stamp duty (on an ad valorem basis) that is only charged when Bahamian real estate is conveyed to trustees or non-beneficiaries.
6) Taxes
The Bahamas Executive Entity (BEE) is a legal entity that is designed to act as a ‘power holder’, whereby it exercises one or more powers/functions within wealth management and corporate structures. For example, it can serve as the protector of a trust or foundation, the settlor of a trust, the ultimate shareholder in a family holding structure or shareholder of a private trust company, among others. Consequently, it can hold key ownership, management, supervisory and investment advisory roles usually held by individuals within such structures, which allows for enhanced governance safeguards and structural continuity, while reducing individual liability and protecting individual identities. It also offers the potential to simplify the operations and reduce the long-term costs of complex structures.
1) Bahamas Executive Entity
A private trust company (PTC) generally acts as trustee of a specific trust or a group of trusts. The Banks and Trust Companies Regulation Act, 2000, introduced specific regulations for PTCs. Provided it does not conduct trust business, it is exempt from licensing requirements. A PTC allows wealth creators to retain control over the ad¬ministration of his/her own trust, and by using a BEE to hold the shares of their PTC they remove the need for a special purpose trust to hold such shares further simplifying the administration of their structure.
2) Private trust company
The Exempted Limited Partnership Act, 1995, offers wealth creators the option of including Exempted Limited Partnerships as part of their wider wealth management structures, which may be holding trading entities or high-risk assets. An Exempted Limited Partnership limits the liability and exposure of its limited partner(s), which is an attractive key feature.
4) Exempted Limited Partnership
It is clear that The Bahamas is well positioned to enable wealth creators to put in place robust, flexible and resilient wealth management structures as part of their wider planning strategies. As a well-regulated jurisdiction with a long history in the wealth management industry, it stands notably ahead of most other offshore and onshore alternatives.
Closing remarks
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Investment strategies through systemic research – how technology is affecting business
most violent atrocities of war back onto the map of Europe. The associated increase in energy prices is partly responsible for the return of inflation, which we thought was dead, and which is still on our minds to this day. Investment strategies that are formed through systemic research can help the retail investor make better-informed decisions by considering the broader economic and social context in which companies operate. Systemic research involves analysing the interconnected relationships between different factors such as economic trends, industry performance, market conditions and government policies. By looking at the larger picture, the educated investor can gain a deeper understanding of the risks and opportunities the different markets and industries face, and develop his or her investment strategy. One major factor that is currently affecting businesses is technology. The way that companies communicate, operate, and compete in the different markets is changing. One example is the rise of digital payment systems and E-commerce platforms. With their introduction, companies can now reach new clients and areas worldwide. At the same time, the advances in Artificial Intelligence (AI) and machine learning are allowing companies to gain new insights into customer preferences and behaviours. This leads to targeted and more personalised marketing strategies.
ho would have thought that when the Covid-19 pandemic subsided, we would fall into the next crisis mode. Completely new information had to be processed on the financial markets in 2022. The Ukraine conflict has shaken the global community to its core and brought the
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Diversification remains the key to the construction of more robust portfolios. For this purpose, investors might also consider the partial allocation of their investment portfolio into hedge funds
The Bahamas: A world contender
In the search for investment success in the financial markets, every investor – whether private or institutional – is confronted with an unmanageable amount of information. With a realistic self-assessment, you quickly realise you cannot process this wealth of information and condense it into an investment success on your own. In order to understand what is driving the performance of a portfolio, it makes sense to look at the factors and their application. A wide variety of factors are used as filters to screen available company and price data to evaluate possible investment markets. Systematic investing is an investment approach that emphasises data-driven insights, scientific testing, and disciplined portfolio construction techniques to seek varied portfolio outcomes. The mid-cycle environment is still a positive one for riskier investments, and clients remain invested with a moderate risk appetite. The exact rate of inflation and growth is uncertain and will probably remain controversial in the coming months, which means that volatility can be expected to persist. Diversification remains the key to the construction of more robust portfolios. For this purpose, investors might also consider the partial allocation of their investment portfolio into hedge funds. Aside from this macroeconomic stimulus, there are also a variety of factors driving general asset allocation. The fiscal priorities of the individual states are likely to be on infrastructure investments, while the fields of biotechnology, AI and equipment should be carefully observed. However, in 2023 and beyond, the topic of environmental sustainability will probably dominate some of the investment strategies. The earth needs help. The most recent natural disasters around the world show that climate change is top of mind, and the urgency to address it on a scale of 1 to 10 sits at 9.9. It is real and everyone must do their part to avert what scientists have dubbed “the sixth mass extinction event”.
Investment ideas that could drive markets in 2023 include the comeback of mega-cap stocks, carbon capture technologies breakthrough and the up-swing in the commodities super-cycle. Diversify your portfolio by investing in a range of companies across different industries. This will reduce your exposure to the risks associated with a disruption in any one sector. The savvy investor should also keep a close eye on regulatory developments. By staying informed about regulatory changes, investors can anticipate potential risks and adjust their investment strategies accordingly. To take advantage of the volatile markets, traders can rely on state-of-the-art trading platforms. There are numerous trading platforms on the internet, via which speculative investors can trade in various financial products. These include stocks, bonds, ETF’s, currencies, crypto and derivatives. Unfortunately, not all operators of such trading platforms are reputable and need to be diligent when making their selection.
What to look for in a trading platform
The best trading platforms should give the investor a wide selection of indicators and trading tools to further assist with analysing a specific instrument. For example, technical chart indicators help to assess the market and provide an overview of price developments in graphical form over time. They identify trends, support and resistance levels, which then enables investors to find the right times for making buying and selling decisions. Indicators that show trends are called trend indicators or trend followers. However, some of the most used technical indicators are: Moving Averages, Bollinger Bands, Relative Strength Index (RSI), MACD (Moving Average Convergence Divergence), Stochastic Oscillator. Traders often use a combination of technical indicators in their analysis. But even more important than the user friendliness of the platform is the seriousness of a trading platform or the corresponding broker. A trader can recognise a legitimate broker if the company ticks the following boxes: licensed and regulated by a reputable financial institution (Securities Commission of the Bahamas), offers client fund protection, knowledgeable and reachable customer service and segregated client accounts. And where the broker is regulated should be of utmost importance to every trader. As seen during the fall of a well-known crypto exchange in late 2022, multiple international liquidators must sort through the chaotic aftermath of the collapse and work hand in hand with each other. The main US liquidator praised the Bahamian Securities Commission for taking swift action to protect the digital assets held by the crypto giant from being hacked and stolen. If you orientate yourself on the points mentioned, you reduce the risk that you will end up with a dubious broker and thus lose part of your capital or bear excessive costs related to your investment decisions and/or strategies. Overall systemic research is essential for all investors looking to capitalise on the opportunities in the various market segments. By analysing the broader economic and social context in which companies and clients operate, the investor can develop more effective strategies that are better aligned with the changing realities of the global business world.
the Commission has confirmed its intention to review and amend the DARE Act
Dr Iyandra Smith Bryan of Quantfury Trading Limited discusses how sophisticated trading software is saving human traders in The Bahamas and elsewhere from their own dark urges and frailties. The results are often spectacular
How systematic trading and investing overrides bad, emotional decision making
with a decision to buy or sell a position, when sentiments of fear or notions of greed began to obscure your ability to make a decision in a rational and logical manner. We are all driven by irrational factors; ‘being human’ can, unsurprisingly yet regrettably, get in the way of us making the best financial decisions for ourselves and for our lives.
o many of us often find it difficult to manage our investments without emotions of panic or anxiety, leading us to make unsound financial decisions. This even applies to those of us who deem ourselves knowledgeable about the markets. Think about the time you have been faced
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Writing in 1923 about the famous discretionary speculator Jesse Livermore, the American author Edwin Lefèvre captured the fallibility of human psychology when it comes to trading or investing in financial markets. “It is inseparable from human nature to hope and to fear. In speculation, when the market goes against you, you hope that every day will be the last day, and you lose more than you should have had you not listened to hope... And when the market goes your way, you become fearful that the next day will take away your profit, and you get out – too soon. Fear keeps you from making as much money as you ought to.”
We humans are vastly superior to IT systems when we perform tasks that require fundamental analysis and critical thinking, but our emotions often hinder us from using the intelligence that we need to make sound trading decisions. The solution to this problem lies in systematic trading and investing. When we put a trading system in place, it eliminates impulsive reactions and cuts out the human behavioural biases to which so many of us are prone. It also makes it easier for us to pursue a steady and logical trading strategy.
The problem: How can we protect ourselves from our own frailties?
objective data, is a lever that puts just enough friction in place to disincentivise meddling, and produces sounder results. A modern example of a commitment mechanism is to be found in Victor Niederhoffer’s 1998 book, Education of a Speculator, where Victor, a hedge fund manager, has a large long position in silver futures. In the book, the Hunt brothers, who had been manipulating the market upwards, are about to succumb to market events that will cause the price to drop. “I decided to set my loss limit at 50% of my winnings... The model story on this point is Odysseus... I locked myself inside a racquetball court instead of tying myself to a ship’s mast. I issued instructions to my assistant and future wife, Susan. ‘Do not listen to my entreaties if I wish to double further. If the losses reach 50% of the winnings, reduce my positions by one half. If I beg to be released, sell everything out’...Some rumours about liquidation by the Hunts had hit the fan... I immediately placed a call to Susan: ‘Untie me, disregard everything I said before’...My faithful companion followed my original directions.” Susan, Victor’s partner, was the commitment mechanism. She closed the entire position and Victor went on to continue his journey. Not all of us have a Susan, so a trading system helps ensure that we remain committed to the goal at hand. Systematic trading, in other words, provides traders with a transposable groundwork for trading that can be better managed from a risk perspective.
wrote that during the financial crisis of 2008 his team was terrified and considered liquidating all of its positions in global financial institutions. He wrote in his book Systematic Trading: “After yet another crisis meeting, where we decided to take no action for now”, despite the portfolio managers feeling that it would be best to make some decision, Carver returned to his office the next day and “for the first time in our firm’s history... we had made over a billion dollars in a single day. Our computer system had stuck to its pre-programmed set of trading rules and mechanically exploited the market moves almost to perfection, while [we] terrified humans had discussed [just the day before] us closing it down.” Another frailty of human psychology embedded within a large cognitive bias is overconfidence. We often believe we are smarter than we are, that we have more knowledge about the trading system than we do. This overconfidence can propel us to make decisions on the theory that because we are smarter, we know more and, as a result, our decisions are more sound. This, however, could not be further from the truth. The confidence that we have in our capabilities is often too great because it fails to take into account one of our greatest limitations. Significant personal ‘life events,’ such as divorce and separation, have also been shown to affect a trader’s performance. In an article entitled Limited attention, marital events and hedge funds in the Journal of Financial Economics, the authors’ research concluded that fund managers generated lower realised returns in the years surrounding their divorces. Their stock-selection skills were poorer and their risk-adjusted returns deteriorated and were weaker when compared with control samples. This is evidence that human frailties make discretionary trading and investing so much more arduous over an extended period of time.
The solution: Systematic trading and investing
accuracy, both in the short and medium term, enabling them to keep risks within an approximately limited band. The trader can use conscientious statistical methods to evolve a sound risk-management framework. Together with the use of scientific methods to gauge volatility, systematic trading allows limits to be posited and observed in order to control risks and exposures. Upon these limits being reached, position sizes can be automatically capped or minimised.
Systematic investing has produced better performance
Countless research has been done on the performance of systematic investing versus discretionary investing; it has shown that systematic investing often generates far higher performance and is more consistent than discretionary investment. In the Journal of Alternative Investments, researchers concluded that systematic trend-following fund managers had higher returns and better performance than those in other categories. Similarly, researchers from the Man Group analysed the performance of systematic and discretionary managers and concluded that systematic macro funds outperformed discretionary macro funds.
Systematic trading and investing is accessible
For those beginning their journeys into the capital markets, it is easier than ever to trade or invest in a systematic way. There are a host of global retail brokerages, such as Quantfury, that make it easy for users to submit orders automatically via mobile applications, making fully automated trading a possibility. Moreover, data such as historical prices, company research and news reports can be downloaded from various websites easily and at no cost. Systematic trading and investing allows users to make investment and trading decisions in a methodical way, with a high degree of ease.
Edwin so eloquently captures one of the weaknesses associated with being human: our inability to remain calm in the midst of panic. What do so many of us do when the market is collapsing? We panic, we run, we exit. Robert Carver, a portfolio manager for one of the world’s largest hedge funds,
System trading and investing also institutes a commitment mechanism that prohibits the interference that may result from the cognitive biases that we humans have. When we institute an objective trading system, we create an omnipotent commitment mechanism. Such a system sets a line in the sand, delineates the rules, is backed by
A systematic trading approach permits traders to be more disciplined in managing risks, as an appropriate risk management framework can be constructed within the trading strategy itself, rather than being treated as a side-note. The trader can apply or operate within a stated level of risk or permit a variation of risk within a specified range. Statistical techniques permit traders to determine volatility forecasts with a reasonable measure of
Divorce and separation have been shown to affect a trader’s performance
Systematic investing often generates far higher performance than discretionary investment
How systematic trading and investing overrides bad decision making
Chris Illing discusses
VIDEO LINKS
video links
Michele Fields, Superintendent of Insurance at the Insurance Commission of The Bahamas, talks about the captive insurance industry and what regulatory changes we can expect in the country
Guilden Gilbert, CEO at CG Captive Managers, discusses the typical structure of a Bahamas captive, and explains why so-called 'Mom and Pop' captives are ideally suited to setting up in the area
Dr Tanya McCartney, Executive Director of The Bahamas Financial Services Board, discusses diversity and inclusion in the jurisdiction, and what financial services can expect in the next 12 months
Paul Winder, Head of Fiduciary Products & Markets, Deltec Bank, and CEO of Deltec Fund Services, explains how the pandemic is affecting the 'seismic transfer of wealth' from Baby Boomers, and how their heirs differ in investment profiles and philosophies
Keith Major, Senior Associate at Higgs & Johnson, discusses the current state of aviation in The Bahamas and recent achievements in the industry, and why there's 'always room at the top'
Chris Illing, Chief Commercial Risk Officer at ActivTrades, answers question on volatility, the challenges awaiting the industry in 2023, and the advantages of being based in The Bahamas
Dr Iyandra Smith Bryan, Chief Operation Officer at Quantfury Trading Ltd, discusses remote working, prospective areas for further growth, and her objectives for the year ahead
