At the risk of oversimplification, investing requires a certain level of speculation.
For every trade, someone is selling or buying too early (or too late if you look
at the glass half empty). To be on the winning side of a trade more often than not
requires an “edge”; something that provides a higher than average statistical chance
of being right. Few are capable of doing this (1). However, there are some superior
investors or traders who are somehow able to outperform market averages on a fairly
consistent basis. When others try to replicate their methods by using mathematical
models, the results are not equivalent. There is something personal, something intangible
that allows the Warren Buffet and George Soros to outperform the herd that we know
as mutual funds, the indexes, and your local financial advisor. Unfortunately, by
the time these investors are well known, their returns are diluted by the size of
their holdings (2). A billion dollar fund can not take advantage of small company
stocks that have large potential for gain. A billion dollar fund can not be agile
enough to get out of a trade quickly when needed. Shadowfund’s “edge” is to trade
with exceptional traders that both buy and short equities appropriate for accounts
less than $1M.
