Paradox Capital Management

Paradox’s investment methodology consists of trading a portfolio of 34 futures markets by employing a largely computerized, systematic trading program. The system tracks daily sentiment, volatility, price and other movements from these markets and computes which markets we should be trading, how long or short our positions should be within those markets, then constructs a portfolio. The primary driver of our trading signals is quantified sentiment data – not price. <br><br> The overriding theme that drives the algorithms is the identification of Fundamental Attribution Errors (FAE) within the markets. FAE (also known as correspondence bias or attribution effect) are a behavioral finance theory that states: we as humans possess a cognitive bias that leads us to overestimate the importance of fundamental traits and underestimate the importance of situation and context. <br><br> The result of this genetic bias is that investors, who focus their decision-making largely based on fundamental traits such price or economics, tend to end up with similar positions due to herding and other networking effects. This avenue of analysis puts them into a context of “crowdedness” within their positioning and opens them up to the risks of path-dependent, non-linear market dynamics such as abrupt short squeezes and long liquidations following periods of lopsided sentiment. When market positioning is highly-crowded, the risk of an “unwind” becomes acute. Paradox searches for, and locates, these opportunities in order to fade the consensus. The result is a counter-trend/trend reversal system that presents a complementary (negatively-correlated with both trend-following and short-term trading) return distribution that is additive to most portfolios of CTA’s.