Active management requires the anticipation of what other players in the game may do next. No one will ever do that perfectly, but it starts with understanding the expectations of those best informed.
Looking at historical actions and price relationships may help present a backdrop, but the most useful information must be current and forward-looking. We provide exactly that by analyzing the day-by-day behavior of market-making competitors as they protect themselves while taking the necessary risks inherent in their business.
We have collected their evolving daily expectations into tables of subsequent price behavior, stock by stock, and ETF by ETF. Over 5 million pairs of upside and downside forecasts provide the basis for actuarial tables that tell the odds for profitable price change, and the probable size of payoffs, both negative and positive, at each level of the array of balances between downside risk exposures forecast, and upside returns projected.
These tables offer guidance that goes beyond the best forecasts, providing an evaluation of where the most effective future insights occur. These have the best odds for gain and their complement of the least odds for loss.
Further, there is a sense of proportion in the size of payoffs, both of gains and losses. Since it has been demonstrated that investors hate loss more intensely than they love profit, knowing both potentials is important.
Beyond that, knowledge of the likely extremes urge the professional against pushing unreasonably beyond average expected gain targets, sometimes only to lose even those. And on the loss side, the extreme possibilities may be good reason for avoiding an otherwise appealing opportunity.
Armed with knowledge of odds and payoffs, the active manager can set realistic price targets for investment commitments, within time horizons that can reasonably be foreseen. He thus has a basis for choosing between opportunities and for excluding probably inadequate performers.
Also, by having a well informed ex-ante sell discipline in terms of both price bounds and time frames, managers are more likely to realize gains optimally, and less likely to allow underperforming commitments to languish in their books.