Dan Ripoll: A Scientific Approach to Investing

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>>Hi welcome to Dog and Pony, I'm Vince Thompson. With the markets gyrating wildly and the future uncertain, it's an interesting time for startups. Imagine launching a financial startup right now. Well Dan Ripoll, Co-Founder of Aeon Capital and his partner are doing just that with the hedge fund that has the goal of helping their clients successfully manage risks. Tell us about the experience you and your partner had and how you decide to start a hedge fund.

>>Dan: My partner and I actually met years ago back in 1996 on the equity and derivative trading desk at Merrill Lynch. Back in 2003 we went on a research initiative designed to improve the scalability and risk management features of our trading strategies. After a few years we developed something that was scalable and that was capable of becoming a fund. And so we launched the fund in February of last year and here we are today.

>>Vince: Can you start by telling us a little bit more of what a hedge fund is and how it works?

>>Dan: The difference between a hedge fund and a traditional investment like an index fund or a mutual fund is that hedge funds have more latitude to manage risk per clients. So what that means is in an environment like this, hedge funds can use derivatives or futures or reduce their holdings and equities in order to protect clients from the downside of a market such as the one we're in now.

>>Vince: This really comes down to trust. People are turning their money over to you, how do you build trust with people?

>>Dan: We build trust, I think, by explaining and trying to be very clear about what it is that we do. A lot of people in the general public think of investing as rocket science and it's really not. And so what we try to do is bring it home and put the things that we do in concrete terms that people can understand. And when people feel that they can understand the process I think they're more likely to trust you and invest with you.

>>Vince: Market risk, it's on everybody's mind, right? What advice do you have for people in turbulent markets?

>>Dan: Don't try to pick the bottom. That's the - I've been in this game a long time and that's the mistake that I see people make over and over again. Ninety five percent of the public, if you were to show a stock chart let's say, to an individual and let's say you showed two stock charts. One you showed a stock going up, let's say Apple computer, from $10.00 to $50.00, I think earlier in the decade and a stock that went from $50.00 to $10.00. Well the majority of the investment public would say that they're more interested in buying the stock that went from $50.00 to $10.00. What we're saying and what our empirical research has proven is that the stock that's going up is likely to continue going up and the object in motion is likely to stay in motion. That exists in the market too. And so we focus on opportunities where things are performing because the likelihood is that in the future those same things will continue to perform. And what we do is we focus on limiting the losses on adventures where we're wrong.

>>Vince: We're talking today in late 08. You haven't lost any money for your investor's this year. Almost all of us have lost money. Talk to us about that.

>>Dan: There're two main reasons for that, one is diversification, the second is risk management. We'll start with diversification. The best anecdote for an efficient portfolio is broad diversification. If you think of the fund as an airplane then diversification across assets, especially assets that aren't correlated to one another, can be thought of as the airplanes wing span. The longer the wing span the more stable the ride. And so what we do is we include assets that are not correlated stock such as currencies and commodities and we trade those both long and short. On the risk management side, say you were to take a coin, a quarter, and every time the quarter landed on heads you would earn .25 cents. When it lands on tails you would lose .25 cents. Say you had a way, you had a risk management process where you only lost .10 cents on adventures where you landed on tails but you didn't do anything to cap your upside on adventures where you flipped heads. And so over a thousand flips of the coin now that you've limited your downside, you'd have a $75 profit. That's all our process does is limit the downside on adventures where we're wrong and we do nothing to cap our upside on adventures where we're right and so over time that expectancy is realized over a large sample of trades.

>>Vince: How do you think the market's gonna change and the financial industry is gonna change as a result of what we're going through?

>>Dan: I think people are going to begin to question traditional wisdom. Armies of brokers and analysts preached a certain methodology which is based on buying and holding through periods of time, long periods of time and what we're saying is that there's a more efficient way to put your money to work or at least ways to protect your capital so that you don't suffer these types of declines. We've discovered ways to do that and that's what we do. We aim to make more money over time by losing less in times like these.

>>Vince: Dan Ripoll, co-founder of Aeon on Capital. Thank you very much.

>>Dan: Thanks for having me.

>>Vince: Yeah, it's been great having you on Dog and Pony. As always if you have questions or comments or just want to stick around and read our blog, go to Dogandpony.com. I'm Vince Thompson. Thanks so much for watching.

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