To Our Partners of HIT Capital,
I hope this update finds you doing well and enjoying the beginning of 2022. We had a successful year building out our value and momentum strategies while maintaining positive returns. A few of our more exciting accomplishments were in the development of our investment software and the direct integration of behavioral biases into the investing process. I’ll share more on the software and investing process below, but first let’s start with the fund’s performance and allocations.
HIT Capital ended 2021 up 4.52% and below the global benchmarks: International 5.41%, S&P 500 27.04% and the hedge fund index 10.03%. This brings HIT Capital’s compounded annual growth rate to 12.2% and total return since inception to 181.81%.
Our value and foreign exposure in Turkey (6%) and China (13%) had annual returns of -27% and -43% respectively and were a noticeable drag on our 2021 performance.
As the investment analysis software becomes more robust and I become more confident in stock picking, the allocations will become more focused, and the returns are expected to diverge from the benchmarks more often than in previous years when Beta Slippage and Contango held larger allocations.
Research – We Can Have It Both Ways
When we were reviewing the top value stocks from our investment analysis software in the first half of 2021 we found a few stocks growing in revenue, price, and profit. This finding was outside academic and mainstream thinking and was the confirmation I needed to pursue adding growth metrics into our analysis.
Building off of our prior research on more than 275 factors, I chose two growth metrics that historically outperformed and were driven by behavioral biases. I will share how the growth metrics link to behavioral biases in our personal and behavioral finance blog, if you are interested you can subscribe here.
Big Data and the Hard Restart
These two key growth metrics are low volatility and intermediate momentum. Upon choosing these I learned they both required daily data, which we didn’t yet have. Daily instead of quarterly data would triple the size of our database and quadruple the current 240-hour program running time requirement. Since 240 hours was already lengthy, and my goal was to have it done in 7 hours or less (while I sleep), I decided to tear the code down and rebuild. In early December, after late nights, early mornings, and three code versions, we had a program that gathered and cleaned daily data on 10,227 companies in 6 hours or less.
HIT’s Magic Growth Formula
Now that we have the data, we can calculate our magic growth formula, High Quality Momentum (HQM).
High Quality Momentum = intermediate price momentum + low-volatility
Intermediate price momentum is the observation that you typically outperform the market when purchasing stocks that have the biggest price increase over the past 3-12 months. To capture this we rank each stock on the 6, 9 and 12 month geometric monthly return and then average the rankings across each time frame for a final intermediate momentum rank.
Low volatility is based on low volatile stocks having historically returned more than high volatile stocks. (This observation is seen most clearly through the highly volatile, lottery type stocks.) We rank each stock on it’s daily price path over the past 6, 9 and 12 months and the smoother, or less volatile the price path, the higher the quality the momentum signal.
When we combine the intermediate momentum and volatility rankings, we get a high quality momentum (HQM) rank that we can add to our value ranking.
The first investment sourced from value and HQM was an Israeli cargo shipping company, ZIM. ZIM ranked #30 in value, #78 in High Quality Momentum and #2 overall out of 10,227 investments.
Regulatory (No Change)
HIT Investments and HIT Capital are both still undergoing an audit by the Texas State Securities Board. We have not received an initial audit response from their surprise visit in late 2019.
2021 was HIT’s year of freedom to learn, build, test, and rebuild. In 2022 our process will be similar and with a goal to build out the investment analysis software front end, refine the trading strategy, and to continue developing our qualitative knowledge and subject matter expert relationships.
Thanks for your love, trust, and friendship. Until next time have a safe, prosperous and joy filled 2022.