Smart Timing

By Will McClatchy, Editor

PHILADELPHIA, PENN. - Market timing is viewed almost as skeptically as stock picking by many indexers. But officials at new money manager Aexpert Advisory, Inc. insist they have a unique timing strategy. It involves artificial intelligence techniques to switch in and out of S&P 500 no-load index funds.

"What most folks who attempt to time the market do is work with linear models or linear thinking to determine entry and exit points in a non-linear phenomenon," said Ken Ray, CEO of Aexpert Advisory, which can be visited at www.aexpert.com. "Our approach is an adaptive approach. It is not a stationary or static model. It adapts to a changing environment."

The firm features Market Minder, a conservative growth strategy that mirrors the S&P in most periods but switches into cash or an inverse S&P index when a reversal appears imminent. It also offers Market Minder Pro, a more aggressive version that seeks to substantially outperform the S&P in up and down markets. Because of frequent switching, these strategies generate substantial capital gains and are generally recommended for tax-sheltered retirement accounts. So the company also offers Market Minder VA, an annuity investment strategy with goals similar to those of Market Minder. The firm uses Rydex and ProFunds index funds.

"Most people will have a single model," said Ray. "One of the things we have done that is profoundly different is that we have identified 14 different patterns in the market. In any given day we will identify which of the 14 patterns is dominant that day. Then we bring in a specific model for that particular market. A lot of the technical analysts are not using sub-models and they are using linear as opposed to non-linear analysis."

The system is proprietary and Ray would not say what inputs, hardware or software are used.

"There are times when we may be in a position for a couple of days," said Ray. "There may be other times when we may be in a position for a month and a half. Right now, we are probably beginning a period where we will experience a bullish period that will persist longer than the one we have experienced in the last two months."

"As new data is fed into, the neural nets are responding to the new data," he said. "As we cross through certain thresholds where optimal performance is different, the system is automatically updated to perform most effectively in that slightly different environment."

A neural net is an interconnected assembly of simple software elements that learns to identify and react to patterns after repeated stimulus, much like an animal neuron. While the neural nets are busy identifying patterns in vast amounts of market and macroeconomic data, a separate artificial system called a rule-based inference engine sifts through numerous rules of thumb called "If-Then" statements to arrive at conclusions. Rounding this out are more traditional technical, or standard market indicators analysis, algorithms that identify trends.

"People can say it is not possible to do what we are doing," he said, but astute investors "look at our performance and see us consistently provide returns in excess of the market with equivalent or below market risk and a daily liquidity of a money market fund."

The models have been tested on historical data, but the company cannot show more than one full year of actual returns for public investors. For Market Minder, the company reports one year of actual results net of fees from 3/12/98 to 3/12/99 of 23.04% vs. 21.00% for the S&P. For Market Maker Pro, results net of fees from 9/30/98 to 3/12/99 were 37.65% vs. 27.29% for the S&P. For Market Maker VA, the results are 18.32% net of fees for the period 6/30/98 to 3/11/99, vs. 14.45% for the S&P. Standard management fees are 1%, and Market Maker VA has a 5.25% annuity load.

Low minimum investment, no loads and no penalties on switching between strategies are designed to attract the individual investor.

"You can invest it on a Tuesday and if you don't like it, take it out on a Thursday," said Ray. "There is a real tendency [in sophisticated hedge funds] that a small investor does not get the same quality of service than the large investor."

While the numbers are not all in yet, Aexpert Advisory is clearly offering one of the most sophisticated money management services in the world for the retail investor.

The firm can be visited at www.aexpert.com.

03/15/99