In this article by OmniFunds designer Steve Byrne, he explains his philosophy and approach to creating winning OmniFunds.
"My Omnifund development is primarily focused on specificity, not diversification. Each fund employs numerous safeguards, including rigorously tested filters and switches. My strategy aims to maximize returns by continuously investing in the top performing stocks.
An Omnifund is a precision tool, employing ranking and switching. In its basic form, it can rank a list of stocks based on any given criteria. For instance, in 2020, one of my Omnifunds ranked TSLA at the top of the ranking for growth stocks, a position it held for most of the year. An investment in TSLA for the whole of 2020 would have returned over 600%. Similarly, in 2023, NVDA was the top-ranked growth stock for most of the year, promising a return on investment of over 250%. Even during the market downturn of 2022, an investment in XLE would have returned over 50%.
Omnifunds are not rigid. They can switch in and out of stocks, adapting to market conditions. For instance, if a stock at the top of the ranking enters a downturn, an Omnifund can swiftly switch into the next stock in the ranking that is trending up. A market-state switch can also be set to exit any trades during a market downturn. Ranking switches and the market-state switch can be adjusted independently to limit drawdowns, showcasing the Omnifund’s adaptability.
Regular switching of ranked stocks can increase the benefit of compounding, provided they are switched at the right time. Diversification can be introduced by using different ranking criteria, but the criteria should have a solid foundation; any reduction in returns should be avoided.
Black swan events can be minimized by using an appropriate ranking list, e.g., the Top 20 high-cap stocks NAS100. In addition, an Omnifund can avoid whipsaws by using an appropriate filter. Trading through Earnings can also be avoided.
Drawdowns are inevitable for any investment. Remember, unless equity is realized immediately following a drawdown, the loss has not actually been incurred. If investors require diversity in their investments, it would probably be beneficial to invest in several different Omnifunds (future Omnifund feature). Each Omnifund should have its own distinctive ranking criteria.
Finally, I like to use a horse racing analogy to clarify my position regarding specificity. Imagine you're at a horse racing event, and you have the option to bet on multiple horses in a race. Diversifying your bets would mean spreading your money across several horses, hoping one of them wins. My approach with Omnifunds is like studying, by rigorous analysis, each horse's past performances and their current form, and then placing my bet on the one horse that has the highest likelihood of winning.
Instead of spreading my bets thin and hoping for the best, I put my money on the horse with the best odds of winning. If that horse starts to falter, I can quickly switch my bet to the next best horse, always keeping my money on the strongest contender at any given moment. I know I will be on the winner at the end of the race."
Steve Byrne
