Why Trading the Market Well is Like Racing SailGP Boats
The best traders think like elite sailors, using leverage and short selling to move faster than and even against the market wind
The standard advice for investing is great for most people. Buy and hold an index fund like the S&P 500, and sit through and wait out the occasional bear market. Close your eyes, and thirty years later, you have a respectable nest egg. This is a perfectly sensible way to manage money if your goal is 10% annual returns.
But what if you are much more ambitious? What if you are the sort of trader with high expectations that the legendary fund manager Peter Lynch mocked in his book One Up on Wall Street?
I’ve heard people say they’d be satisfied with a 25 or 30 percent annual return from the stock market! Satisfied? At that rate they’d soon own half the country along with the Japanese and the Bass brothers. Even the tycoons of the twenties couldn’t guarantee themselves 30 percent forever, and Wall Street was rigged in their favor.
For returns like that, you need a different mentality, the mentality of a SailGP skipper. For those kinds of returns, you need to get on a boat that flies.
F1 on Water: SailGP
The SailGP Championship is a global racing competition that pits sailing teams from around the world against each other in a series of high-speed, high-stakes races. The New York Times aptly likened it to Formula 1 on the water. The boats are not your grandfather’s leisurely sailboats; they are F50 catamarans, feats of engineering that use hydrofoils to lift their hulls entirely out of the water.1 They fly.
To win, skippers must take enormous risks to go fast. They must accurately read the currents, the shifts in the wind, and the shape of the waves on the horizon. A misreading of these signs, a moment of lapsed concentration, and the boat’s hull will crash back into the water, killing all momentum.
Make a truly bad decision in a particularly rough patch of sea, and the boat will wipe out spectacularly, with no chance of finishing the race, let alone winning it.
SailGP requires enduring intensely volatile conditions at speeds that seem impossible for a vessel solely powered by wind.
The ocean can be vicious and merciless. It rewards good luck and skill heavily but punishes bad luck and a lack of skill just as heavily. This should all sound vaguely familiar to traders because the market is exactly the same.
The Merciless Ocean/Market
Whether one likes it or not, managing an active trading portfolio is like piloting a sailboat in the open ocean.
This seems like a ridiculous comparison on its face. Traders stare at glowing screens all day in climate-controlled rooms while SailGP skippers perform incredible feats of athleticism and bravery. But the core truth of the analogy holds.
Your portfolio is the sailboat. The market is the stormy ocean, a force fully and completely outside of your control. As traders and investors, like skippers, we have no control over the primary determinant of our returns: the market itself.2
We can only control our own actions; we can buy, hold, or sell based on our analysis of what the market is doing and what we think it might do next. This is how the best traders reckon with a force vastly larger and more powerful than themselves. They cannot command the waves, only ride them expertly.
The stakes in trading are arguably even higher than SailGP. It is not just about victory or defeat. It is about the stewardship of all your assets under management. A wipeout doesn’t just mean a DNF next to your name; it can mean total financial ruin for yourself and your clients.
Sailing Faster Than and Against the Wind
Here is where the analogy gets particularly good. These SailGP sailboats can move up to four times faster than the actual speed of the wind. They can do this while moving both with the wind and, counterintuitively, against the wind’s direction.
Yes, you read that right. By using their massive vertical wingsail and carefully angled hydrofoils, they generate their own apparent wind, allowing them to achieve speeds and move in directions that defy simple logic.
This is a perfect model for how smart, agile traders operate.
Sailing against the wind is like short selling. An F50 catamaran can sail upwind, making progress against the prevailing force. A sophisticated trader can short the market, generating returns even as the broad market indices are falling. Even with the wind blowing south (a bear market), they can angle their sails to travel north (make money).
Moving faster than the wind is leverage. The wind is blowing at 10 knots, but the boat is traveling at 30. How? Physics, mostly, but it is a form of amplification. Traders use leverage to magnify their returns relative to the market’s movement.3 A 2% market move can become a 4%+ gain in the portfolio. Of course, this cuts both ways, and a 2% move against you can just as easily become a 4%+ loss. Leverage, like hydrofoiling, is powerful but unstable.4
Reading ocean conditions is market analysis. The team of skippers on the sailboat is in constant motion. They steer the boat, they adjust the foils to keep the hull airborne, they trim the wingsail to optimize power. They are constantly monitoring signals: the water texture, the wind speed and direction, their competitors. Likewise, traders constantly monitor signals in the market; they watch order flows, economic data releases, sentiment indicators, and chart patterns. They adjust their positions accordingly, trimming their proverbial sails for the financial weather.
Enduring the ride is accumulating time in the market. Piloting a foiling catamaran is a bumpy, intense experience. The same is true of managing a leveraged portfolio in a volatile market. It requires a strong stomach, the discipline not to panic at every lurch and spray of water, and the fortitude to keep calm and carry on amid market chaos.
This is how ambitious traders consistently beat the market. They are not passive participants, content to be pushed along by the breeze. They are actively harvesting the proverbial wind and ocean currents, using advanced tools and techniques to move faster than the market and at times, in the complete opposite direction of it. This is why SailGP serves as the perfect analogy for the agile trader attempting to generate outsized returns amid the rough and tumble of the market.
About
Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.
We have generated 52% annualized returns (39% after fees) since inception.
How We Invest
Minimize allocation to individual stocks due to their unpredictability
Build the most suitable trading strategy and go all in. Here’s an example.
Be prepared for bear markets and ensure profitability during bad times by implement a short selling component to the strategy
A hydrofoil is essentially an underwater wing. As the boat moves forward, water flows over and under the foil, creating a pressure differential that generates lift, just like an airplane wing. At a certain speed, the lift is strong enough to push the entire boat up and out of the water, dramatically reducing drag and allowing for incredible speeds.
People will argue about this. A big enough player, perhaps a central bank or Elon Musk, can certainly influence the market. But for basically everyone else, the market is a force of nature. We are price takers, not price makers.
Leverage is the defining feature of so much of modern finance, and it is famously a double-edged sword. It amplifies gains on the way up and losses on the way down, if managed poorly. A skipper who pushes the boat too hard in the wrong conditions will capsize; a trader who uses too much leverage will get a margin call.
Besides leverage, the other way to generate outsized returns is concentration. It doesn’t fit as well with the sailing analogy but is just as powerful and unstable as leverage.
AQR’s Cliff Asness on leverage vs. concentration risk:
I think people prefer concentration risk to leverage risk to their detriment.
Conventional wisdom holds that sensible investors avoid leverage. This is unfortunate. Sadly, the valuable role of leverage, applied prudently and used to diversify, not simply amplify, is widely misunderstood.
Consider how investors often seek higher returns through more concentrated portfolios, say through greater equity exposure (concentrating in the more aggressive asset class). However, modest use of leverage can allow investors not to take on more risk, but to take the same level of risk but with a more diversified, more balanced, higher-return-for-the-risk-taken portfolio.
In this way, modestly levering a better, more diversified portfolio may improve upon an unlevered, much less diversified one — a rather sensible approach; one that is consistent with finance theory and will likely compensate investors for the necessity of employing some leverage.