This Fund Manager Tells How He’s Able To Time The Market

The old investing adage says, “Buy low and sell high,” which should be every investor’s goal. However, many retail investors tend to buy high and sell low as they attempt to time the market but just end up trading on knee-jerk reactions based on news headlines.

Virtually every financial publication has the same advice for investors: don’t try to time the market! However, one hedge fund manager boldly claims to be able to do it. The name of his fund, the Systematic Market Timing Fund, even highlights this claim.

Why most financial outlets advise investors not to try to time the market

This article from CNBC displays the typical headline about timing the market: “This chart shows why investors should never try to time the stock market.” The news outlet shared data from Bank of America
BAC to explain why.

The firm studied data going back to 1930 and found that investors who missed the 10 best days for the S&P 500 every decade had significantly lower returns than investors who simply waited out any downturns. Missing the index’s 10 best days resulted in a total return of 28%, compared to the 17,715% return enjoyed by investors who stayed invested in the market through the ups and downs.

Many non-professional investors tend to buy high and sell low because the natural impulse is to sell when stocks plummet. However, Bank of American found that the stock market usually enjoys its best days just after its largest drops. As a result, panic selling can drastically reduce returns for longer-term investors.

BofA’s Savita Subramanian said it takes an average of 1,100 trading days to recover losses following a bear market. She explained that staying invested in the stock market during periods of volatility can help investors recover losses. However, the recovery can occur much faster like it did in 2020.

Unsurprisingly, BofA’s data also showed exorbitant returns for an investor who successfully dodged the 10 worst days of each decade: 3,793,787%. Missing both the 10 worst and 10 best days would have resulted in a return of 27,213%. However, given how challenging it is for professional investors to time the market successfully, non-professionals shouldn’t expect to do it better than them.

An unusual hedge fund

Despite all the arguments against timing the market, fund manager Heeten Doshi of Doshi Capital Management claims to be able to do it much of the time. His Systemic Market Timing Fund has returned 144% since he opened the fund to outside investors at the beginning of 2020.

Doshi’s annualized return since the beginning of 2020 has been 45% through the end of March. Although he doesn’t expect the fund to maintain that high of a run rate, he is targeting a 25% annualized return and a Sharpe ratio of 2 over a market cycle.

“Our fund is unique, given the approach we take,” Doshi said in an interview. “Very few funds attempt to time the market. The strategy invests in the broad S&P 500 index and attempts to avoid macro events. Our goal is to eliminate systematic and unsystematic risk. Our strategy also has low correlations to many asset classes and provides a significant amount of diversification to an investor’s portfolio.”

Why Doshi says he can time the market

He admitted that there is a lot of skepticism when investors hear his claim that he can time on the market. He agrees that it’s nearly impossible to time it on a daily basis but argues that it is possible to “tilt the odds in your favor” over longer periods of time.

“Our strategy looks at data from different disciplines to gauge whether to be risk on (in the market) or risk off,” Doshi explains. “We believe that by combining data such as fundamentals, behavioral and technical, it is possible to time the market over the long term.”

He does think the current macro environment is challenging, as speculation fights against fundamentals, and cycles have gotten much shorter. Doshi adds that corrections are occurring faster, and recoveries are taking only days and weeks instead of months.

“It’s tough to fight a market that has [had] so much stimulus and liquidity for so many years,” he said. “I think over the next year or two, [the] markets will normalize as the Fed tightens and takes some of the excess out of the market.”

Taking a long-term view of the markets

Doshi further emphasizes the need for investors to take a long-term view of the market by explaining why it’s so important to look at hedge funds’ annualized returns rather than their short-term returns. He noted that no investment is immune to all risks.

“There are many factors that can create volatility over the short term,” Doshi states. “Annualized returns allow an investor to gauge how successful a fund is rather than focus on short periods. This past January is a prime example. Many funds had a tumultuous month. Even funds that have provided double-digits, stable gains for years and decades were down double digits in January.”

He added that a few months do not denote a fund’s profile and success.

When Doshi switched strategies

Doshi’s quest to time the market wasn’t always blue skies. They initially started with a discretionary strategy, which caused serious problems for them. In 2018, before Doshi opened the fund to outside investors, they made the wrong call trying to fight a market that was relentlessly moving higher. Then they flipped just as the market corrected 10%.

“We got caught wrong-footed, and that is when I realized the best approach is [to] be systematic and to follow the data. Human emotions and discretionary bias were the wrong approach for the type of strategy we were trying to run.”

The Doshi Capital team reduced their leverage and revamped their risk management strategies to become 100% systematic. They have also started developing software to run the strategy. Doshi also shared some of his favorite current ideas.

“While our fund does not focus on sectors or themes, I personally like tech and growth over the long term,” he said. “Over the short term, I think EVs and the metaverse are exciting themes that can be led to significant appreciation. Over the long term, I like disruptive technology that advances how we live.”

Doshi adds that many stocks have been pushed to “incredible valuations,” but he believes that after they have come back down to earth, they will bring long-term value to investors who time their share purchases right.