With BRC Acquisition, 361 Capital ‘Exploits’ Analysts’ Behavior

In October, 361 Capital acquired BRC Investment Management

Tom Florence, CEO of 361 Capital. Tom Florence, CEO of 361 Capital.

361 Capital’s acquisition of BRC Investment Management is a nod to the growing influence of behavioral investing.

In October, 361 Capital acquired BRC Investment Management, gaining its eight employees and nearly $800 million in assets. BRC’s strategies include large-, mid- and small-cap, as well as Japanese All-Cap Equity.

361 and BRC take a rather different approach on behavioral investing – focusing on the behavioral biases of analysts. Because even analysts are victims of behavioral biases, too.

“We like to talk about crowded trades,” Tom Florence, CEO of 361 Capital, told ThinkAdvisor. “Well, analysts are no different from anyone else. They tend to move as a crowd. So, if the crowd is moving raising estimates then it’s going to probably create more of a probability of an increase in stock prices versus just one analyst.”

This is the behavior they try to take advantage of: analysts changing their estimates.

“What we’re focusing on is the anomaly around consensus estimate changes driving stock prices,” Florence told ThinkAdvisor. “We don’t try to predict what earnings are. What we try to analyze is how those changes in consensus estimates will move stock prices and at what magnitude will they move those stock prices.”

For example, Florence explained, if an analyst were to revise earnings on Apple that say “upward,” that drives stock prices. And analysts tend to move together collectively and follow “whoever has the highest pedigree,” according to Florence.

In order to exploit this behavior, BRC developed proprietary algorithms designed to monetize behavioral biases and market factors in order to pursue consistent alpha for client portfolios. 

“We don’t fundamentally look at the companies and try to predict anything regarding directional movements in earnings or anything related to the company,” Florence explained.

Prior to its acquisition of BRC, 361 was already exploiting the herd mentality that happens among analysts and investors.

361 uses a counter-trend approach in both its 361 Managed Futures Strategy (AMFZX) and 361 Global Counter-Trend (AGFZX) funds.

“They look to exploit markets that are either overbought or oversold and take the opposite view,” Florence said. Adding, “The consistency in our firm revolves around quantitative, counter-intuitive thinking. Revolves around trying to exploit a behavioral anomaly that says, ‘we believe that when everybody runs together, it tends to mean they’re wrong.’”

An even clearer example of this herd mentality in general is the recent presidential election, according to Florence.

“It was very much that the crowd was so heavily weighted towards a Clinton victory – including the media, including the polls, I mean, everything,” Florence told ThinkAdvisor. “[T]hey were missing obviously a lot of the key information, some key information that led to it being a Trump victory. A lot of times the momentum there builds up to be so strong, people just take it for granted that the crowd is right. And that’s a good example of a crowded trade or crowded investing.”

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