What is High-Frequency Investing?
High-Frequency Investing is the application of conservative non-overnight algorithmic trading models to extract profit from various markets as a means to achieve consistency in long-term performance.
What is the difference between High-Frequency Investing and High-Frequency Trading?
In general, High-Frequency Trading (HFT) models are developed by aggressive hedge funds looking for extreme returns. These models are likely unstable and usually end up crashing and burning in a few months or in just a few short weeks, which is why these firms need to keep chasing the next algo that can work in their highly competitive environment.
High-Frequency Investing models are developed to exploit the structural bias in the financial markets for consistent profitability over the long haul. These consistently profitable strategies continue to work year after year for a number of reasons. First, the active market participants have a distaste for these concepts due to the relatively lower profit potential even though they are very consistent and stable. Second, these great trading models do not appeal to the target investors of these aggressive funds, which means that these extremely profitable trading models are still hidden gems.
What is the Difference between High-Frequency Investing and Day Trading?
In general, day-trading models are employed by aggressive speculators looking to generate income from a limited amount of capital. Suffering from the same tunnel-vision as their counterparts in HFT world, the structural biases of the financial markets are ignored. Instead, these short-term speculators choose to use high-risk models in the hope of making a fortune.
High-Frequency Investing employs conservative day-trading strategies to limit risk exposure and to maximize opportunities in extracting profit from the daily fluctuation in various financial markets. Applying high-frequency investing correctly can replace classic longer-term investments with much better return and consistency in performance.
How to Utilize High-Frequency Investing to Improve the Performance of the Portfolio You Manage?
To utilize High-Frequency Investing, you need to ditch classic portfolio theory, because these classic theories completely ignore the importance of tail risk. The so-called “looking at the big picture” and “long-term view” are just lame excuses for money managers to hide behind when being questioned about their dismal performances.
By understanding what High-Frequency Investing can do, you can incorporate it into your portfolio in a controlled manner to boost the return on your portfolio without sacrificing the integrity of your investment approach.
Here is a good example on what you can do to boost the ROI from 5 percent to 8 percent.
Limitations of High-Frequency Investing
For every properly designed HFI model, there is always a limitation on how much return it can produce. It is a function of the liquidity of the market it focuses on. It is a limitation on all algorithmic trading models that choose to stay away from overnight exposure.