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First
Cause Risk Management for Optimal Profitability in Managed
Futures
by Marlee-Jo
Jacobson
This article introduces and
defines 'First Cause Risk Management'. The significant value
'First Cause' provides for optimizing returns is illustrated by a
simple application to managed futures indexes and benchmarks.
'First Cause' is easily integrated into every aspect of risk
management and investment analysis.
First Cause Risk
Management Defined
A trader's ability to produce
positive returns under unknown market conditions is the ONE
fundamental factor influencing future investment returns. From
that focus point, capital at risk, time, volatility, and cost
relative to return are 'unmistakably' defined and evaluated.
Nothing else matters!
The word 'unmistakably' is
essential because 'beliefs' that have no relevance to 'Truth'
permeate traditional analytical processes. Financial losses are
inevitable unless 'belief' and 'Truth' are
unified.
First Cause is defined as
consciousness driving an action. All human action is preceded by
the energy of a thought based in a 'belief.' These are Eternal
and Universal laws of creation, having no opposition. The
physical world is built with human action driven by 'beliefs'. A
'belief' is not necessarily 'Truth'. 'Truth' eventually and
always reveals itself. Because physical reality is re-created by
the 'Truth', losses occur in the physical reality built with
erroneous 'belief's'. When risk management includes a process of
unifying 'belief' with 'Truth', the gap between both, is
eliminated. That gap is the primary cause of ill-fated
losses.
When the cause of a negative
event is eliminated, the event ceases to exist. This 'Truth' has
no opposition and becomes integral to prudent risk
management.
What we call a 'First Cause'
risk management process reduces and in many instances can
probably eliminate the cause of unwanted or ill-fated losses. The
principal is Universal and can successfully be applied to all
professional endeavors. Any application will significantly
improve the quality of service offered. Cost and risk is always
lowered and profitability for everyone involved is always
improved.
When laws of physics and
physical science, are integrated into any risk management
process, decisions can be aligned with the most favorable
conditions currently available to mankind.
A simple non-financial example
is that people once erroneously 'believed' that the world was
flat. This belief was eventually negated by 'Truth' that the
world is round. The 'Truth' was always available, but remained
hidden from human consciousness. It was eventually revealed
through the consciousness of ONE person and became a Universal
Truth. Universal is defined as, having no opposition. The
erroneous 'belief' of a flat world evaporated.
Erroneous risk management
models currently 'believed' as 'Truth' used to determine
investment value may actually cause unwanted losses.
We are talking about major
issues on an enormous scale. If we build reality by means of
'belief' being unified with 'Truth' or Universal laws (Eternal
Truth), risk is managed at the causal level.
A First Cause
Application and Managed Futures Indexes
Conversation with Dan Stark
prompted this example. A few years ago Daniel told me that
Charles Dow originated the Dow Index for the sole purpose of
timing his stock trades. An explosion of stock, interest rate,
energy, and a myriad of other indexes including managed futures
indexes permeate the financial services industry. Many indexes
are used as benchmarks for evaluating portfolio performance. The
original application for indexes is lost. Many applications used
as benchmarks can probably be categorized as 'erroneous
beliefs'.
There is no relevance between
the price movement of an index and the price movement of past
performance data.
1. Changes in index
values are caused by price changes in specific financial
instruments.
2. Changes in performance
returns are caused by the human ability to profit from price
changes in specific financial instruments.
How can accurate decisions
evolve from a foundation of inaccurate analytical
applications?
Now, let's evaluate futures.
The 'idea' of indexes for managed futures began with Commodity
Research Bureau's Commodity Index and maybe Goldman Sachs
Commodity Index. I'm not sure what came first, and for our
purpose it does not matter. An index of commodities is useful. We
live in a world of cash commodities. Similar to how Charles Dow
timed his stock trades, cash market indexes or averages were
evaluated in relationship to futures prices for the purpose of
timing hedge strategies.
We can probably agree that
timing placement of a hedge position is somewhat similar to
timing the placement of stock trades.
Futures markets now exist on
the Dow, Goldman's Commodity Index, S&P, Russell Indexes,
NASDAQ and a myriad of other equity index contracts. These
futures markets serve a valuable economic purpose for
institutions. They can manage portfolio risk by using the futures
markets to hedge.
Now for managed futures
indexes. The index idea for managed futures was originated by
Mount Lucas Investment Management in the 1980's. They created the
MLM Index. It was the first index that included both long and
short positions in commodities. Their intention was to emulate an
investment in managed futures and to teach institutional
investors the value of adding managed futures to their
portfolios. The presentation proved that managed futures were an
excellent inclusion into a traditional portfolio. Rightfully so,
the MLM Index was not presented or used as a
benchmark.
The managed futures industry
grew. We now have sector and style indexes. Sector indexes may
include energy, stock index, diversified, and grain traders.
Style indexes might be systematic or fundamental traders. These
indexes include the past performance data of traders in a data
base and categorized. The indexes are 'erroneously believed' to
be valuable benchmarks for determining CTA
performance.
How can we create an
index of performance data when the only commonality may or may
not be the markets traded? How can the past performance of a
managed futures investment realistically be compared to a managed
futures index?
A gap between the 'erroneous
belief' underlying the application and 'Truth' is quite wide and
can definitely cause ill-fated losses! Ill-fated is defined as a
'set-up' that can lead to financial loss, in the environment that
we cannot see.
'First Cause Risk
Management' eliminates the cause of ill-fated losses, so the
negative event ceases to exist!
The Value of
Philosophy When Applied to Risk Management
We choose to integrate
philosophy relevant to the topic being discussed for several
reasons.
1. Its fun and having fun is
more important than you may think!
2. The philosophical process of
comparing the unseen to material reality, raises our awareness.
It brings us closer to understanding the vital connection between
'Eternal Truth' and our physical world.
3. When self-trust is
increased, we feel better.
4. We become critically
selective when we 'know' that the expert is within each of
us.
5. We enjoy sharing a process
of defining and setting higher standards. Let the industry meet
higher standards set by the marketplace. Many good traders can
and will when challenged.
6. Mediocrity will dissipate
like fine mist.
A specific use of philosophy:
the following is a dedication in one investment guide called "How
to Improve the Profit Potential of Managed Futures
Investments".
"And it is easier for heaven
and earth to pass away than
for one tittle of the law to fail". Luke16:17
"God's world is perfect and
this is the Principle we have to demonstrate. A new light is
coming into the world. We are on the borderland of a new
experience. The veil between spirit and matter is very thin. The
invisible passes into visibility through our faith in it. True
thought deals directly with First Cause, that Invisible Essence
that Ultimate Stuff and Intelligence from which everything comes,
the Power back of creation. The Thing Itself called GOD."
Ernest Holmes -Science of Mind pg60
Now, you may ask "How does
this relate to risk management and money"?
To which I cheerfully reply:
First Cause risk management evaluates the cause of events, which
is consciousness. We (all people, everywhere) currently evaluate
effects or form. Returns are the effects of human consciousness
operating in a trading environment. Risk cannot successfully be
managed by evaluating 'after effects' or forms already created.
Power for constructive change will always evolve from First
Cause.
Since the First Cause of all
life is eternal, infinite, omnipotent, and omniscient; one could
conclude that First Cause is the only method of risk management
that truly allows the unlimited upside of life with much less
risk to simply flow into our environment!
Our only job is to get out of
the way!
About the Author:
Marlee-Jo Jacobson is founder of Sanctity Capital Management, SafeMoneyMetrics and AlwaysSafeMoney. Investment, risk management, business
development and consulting services incorporating SafeMoneyMetrics are offered to private investors, national and
international banks, institutions and financial service
professionals. Contact: 20 East 9th Street Suite 15A, NYC, NY
10003 212-777-3862 mj@sanctity.com
