Branton Kenton-Dau is the architect of the Australian Natural Tail Risk Protection product, effectively a hedge fund insurance policy based on signals measuring electrical current from the sun and creating an electrical version of major markets.
He is selling his data to institutions, high net worth investors and family offices and if it had been applied to the S&P 500 and used to trade - rather than offer risk protection - since 2000, it would have returned a net 18% a year.
In an interview with Asia Pacific Intelligence from his New Zealand base, Kenton-Dau explains: "I've discovered that the markets are influenced by their electrical environment". His data produces signals which he sends his customers. His current product is based on the Australian index, the ASX 200. "Basically the strategies trade about once a month and we let our clients know a couple of days beforehand when to short ASX 200 Futures in order to provide tail protection for any equity strategy that is net long the ASX 200."
Kenton-Dau believes that each market responds to its electrical environment and has been researching his theories since 2007. "I saw how well the system performed during the financial crisis and went on to discover why it worked" he says. "There are three themes. First you have to understand the growing realisation around the world that we live in an electrical universe, with 99.9% of the universe composed of electrical plasma and, particularly in astronomy, this is revolutionising how astronomers look at the universe."
Previously, astronomers believed that gravity was the major force but now, Kenton-Dau says: "Electrical charges in space can be a 100 trillion trillion trillion times stronger than gravity so we are dealing with an incredibly powerful force."
His second point is that electricity cycles and he believes that markets crash in the downside of the electrical cycle. "When you have a crash you have a built in tail protection if you use an electrical strategy for any market" he says. "This is the key point - when viewed electrically the markets have their own natural tail protection."
His third theme is that electrical plasma can self-organise to produce a steady output. "The sun is like a neon light - drawing current from the solar system. But it doesn't dim when the current fails as it did for a few days in May 1999. Why is that? Because, as every electrician knows, electrical currents can self-regulate. Technically its called transformer action."
Kenton-Dau believes that the S&P 500 displays transformer action. "Since 2000 the electrical version of the S&P 500 does not go down, so what that means is that the electrical version of the S&P 500, even though we have had the dot com crisis and the financial crisis from an electrical point of view the S&P500 can maintain a steady output pretty much independent of what the underlying market is doing."
Kenton-Dau created templates of what he had learned from the S&P and applied it to other markets. "Investors can have their own strategies net long say the ASX 200" he says. "Using our short signals they can short the ASX futures which provides them with the cover. It's an insurance policy in the first instance but if you use the long and short side you also have an electrical trading strategy."
"Astronomers have classified stars based on how they respond electrically and I have done the same to the markets." The Australian index was the second that he targeted as a commercial exercise as there is no volatility index to trade in Sydney, making investors in Australia exposed to risk. "You can buy long dated options but there are problems. It's an expensive solution and there is a massive drag on your returns if you have to have that protection all the time because the single most important factor in tail protection is timing which is what makes the electrical tail protection strategy so powerful."
Beyond his beliefs in electrical strategies, Kenton-Dau believes that investors managing money through the financial crisis lost diversification. "It was the cornerstone of financial risk management" he says. "But when every market became correlated we lost the power of diversification to protect us. Of all the tail protection approaches only electrical strategies restore portfolio diversification to centre stage of effective risk management. That's the double benefit of the electrical approach"
Kenton-Dau was included in the panel at the 2011 Opalesque Roundtable New Zealand. You can download that Roundtable here.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.