System 2 Capital LLP
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INVESTMENT PHILOSOPHY
System 2 Capital is founded on the belief that awareness of cycles is critical to the positioning of relative value portfolios. Diversification, hedging, niche credit and volatility strategies and the appropriate margin of safety can reduce the risk of capital loss and provide superior absolute returns across business and credit cycles.
WHY ARE WE CALLED SYSTEM 2 CAPITAL?
A structured and systematic approach to avoidance of decision bias to generate improved decision making
System 1 and System 2
System 2 is an homage to Daniel Kahneman and Amos Tversky, leaders in the field of behavioural economics, who used the concept of System 1 and System 2 to describe different ways that the mind works
System 2 is the name used for the mode of thinking which is slow, deliberate and includes complex decision-making
System 2 is to be contrasted with the System 1 mode of thinking which operates automatically and quickly, but is lazy with little effort and self-correction. System 1 is responsible for the irrational behaviour demonstrated by all of us at different times
Making Better Decisions
Unlike some other asset classes, successful credit investing is arguably more about minimising bad investment decisions, rather than picking great investment decisions
Tversky and Kahneman identified a range of reasons behind why people make poor or irrational decisions and grouped them under the following categories:
Use of heuristics and biases
Overconfidence
How emotions impact our choices
No-one is immune from these influences, so to combat them we subject all our analysis and decision-making to scrutiny under a checklist of each of the underlying risks
In addition, being in a firm named System 2 reminds each person, every day, to focus on critical thinking
Keywords
credit, credit arbitrage, convertible arbitrage, relative value, hedging, diversification, volatility, high yield, special situations, tail hedge, gamma capture
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