“What’s most important to me is that our clients truly understand the model, and  its strengths and weaknesses, so they will understand both our out-performance and our under-performance periods,” says Rajpal Arulpragasam, president of Archetype Risk Advisors, Inc.

Launched in 2015, ARA Archon is a product that exclusively trades the e-mini S&P 500 futures contract. “It’s an intra-day program, and so it’s flat at the end of every day, with absolutely no overnight risk being taken by the program,” explains Arulpragasam.

An MIT-trained mathematician, who focused on complex systems optimization at Stanford, Arulpragasam never looked back after a part-time job 35 years ago with the first boutique yield-curve arbitrage hedge fund, where he learned that he could mathematically model many of the trades being taken by the firm. He soon became a partner and moved the firm to CT in 1981. In 1992, Arulpragasam started his own hedge fund and launched the ARA Commodities Fund, a $200 million dollar fund that earned annual returns of +10.5% over 16 years.

Arulpragasam then formed a joint venture with legendary short-seller Jim Chanos, to launch a market-neutral equity product in 1996. “We took his short portfolio, and then created a long hedge portfolio, to yield a rigorously market-neutral fund that isolated and delivered the short alpha – and that was also a very successful product that grew to $700 million over eight years and also earned very high annual returns,” he reminisces.

Subsequently, ARA launched the ARA Universal Fund, a joint venture with renowned information theorist, Dr. Thomas Cover. This product used Dr. Cover’s ‘universal portfolio’ algorithm to enhance the long-term returns of a portfolio of assets by continually rebalancing them according to the algorithm. After showing some initial promise, it was sadly cut short by the sudden illness and passing of Dr. Cover in 2012.

ARA next embarked on research in behavioral finance and chaos theory and worked with Parallax Financial Research to build some interesting theoretical models, but was not able to monetize those ideas. So in 2014, they developed the ARA Archon model. “We wanted to take advantage of the ‘sweet spot’ between long-term trend following models - with notoriously large draw downs, and the new HFT models that require enormous resources to develop and are fraught with technological complexity,” stated Arulpragasam. In contrast, testing of the ARA Archon has shown very small draw downs and rapid recoveries from them.

The ARA Archon model is comprised of 11 distinct sub-models, each trading its own methodology (e.g. trend, counter-trend, thrust, behavioral, inter-market, etc.) and its own time frame, so the overall model has a lot of diversification. He explained, “That’s one of its great strengths. The best way to understand the program is to think of a team of proprietary traders, each trading his/her own methodology. That’s how we developed the model, by codifying the rules that a good proprietary trader would use to trade long or short for the next few hours.”

Arulpragasam considers his firm small in the context of today’s financial market. It creates niche and uncorrelated products that are a great fit for his $100 to $300 million market, which the larger firms don’t trade, but which attract sophisticated clients seeking to invest one to $10 million in a strategy. “I focus on forging long-term relationships with my clients. We have a client who has been investing with us continuously for 23 years, for example,” said Arulpragasam.

For more infromation, visit: www.araportfolio.com