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Hedge Fund Market Wizard

Larry Benedict : Beyond Three Strikes

The identity of Benedict’s technique is that he looks at markets in the connection of the price action in other markets. Markets are correlated, but these correlations change drastically with time. There are times when the S&P moves along with T-bonds, and at times follows crude oil prices. Benedict closely watches these inter-market relationships minute by minute. 


For example, if two markets are positively correlated, Benedict may short the market that seems to have run up in excess, using a long position in the correlated market to hedge himself.


The timing of such positions will depend on the prevalent price levels of each market. It will not be simultaneous necessarily, either on entry or on exit. 


When short, the selection and execution of actual trades will be highly inconsistent, depending on multiple considerations and experience. The process is entirely voluntary and not formulated.


However, traders must use this approach according to their individual trading style and personal observation. 


There are two main elements of Benedict’s risk management approach. First, he limits the portfolio risk to a small fixed amount of 2.0 % to 2.5 %. Second, when this downside limit is reached, he reduces his position size and trades smaller quantities until he profits again. A portfolio risk level of 2.5 % may be extremely difficult for many traders, but the main idea of setting a predefined loss has extensive relevance. Also, when trading isn't going well, curtailing exposure is a rational action for discretionary traders. 


Trades should be encouraged by opportunity. Traders should be cautious against trading out of money-making desire.

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