Our strategy paper sets out, in 14 pages, the core idea, the quantitative methodology and the risk management of Defy Capital. It describes how we identify trading opportunities, structure and close positions, and which historical results and risks arise from our approach.
This article summarizes the key elements of our strategy. The full strategy paper is available at the end of the article.
1. The strategy: systematically trading short-term price exaggerations
Defy Capital pursues a quantitatively driven short strategy focused on US nano- and micro-cap stocks. With a short position we generally profit from falling prices: we sell borrowed shares and try to buy them back later at a lower price.
Our approach rests on the observation that short-term price movements in certain stocks can deviate considerably from their fundamental starting point. We look for situations in which sharp price increases point to an exaggeration and a subsequent price correction appears possible.
The aim is to identify such opportunities systematically using quantitative criteria and to trade them under defined risk and execution rules.
2. Why nano- and micro-caps?
Small-cap stocks often have structural characteristics that can favor pronounced price movements. These include lower market liquidity, limited institutional coverage and a stronger dependence on short-term news and investor sentiment.
Our strategy paper examines three possible influencing factors in particular:
- Financing conditions: Rising interest rates and more restrictive credit conditions can weigh particularly on smaller companies because of their more limited financial resources.
- Information asymmetries: Lower analyst coverage and restricted market liquidity can contribute to information flowing into prices more slowly or unevenly.
- Behavioral price effects: Social media, investor forums and herd behavior can trigger short-term waves of demand that lead to sharp price swings.
Research on overreaction and behavioral market anomalies provides theoretical and empirical starting points for studying such phenomena. It does not follow, however, that every sharp price move reverses or can be traded reliably and profitably. What matters is the systematic selection of specific trading situations.
3. Quantitative selection and trading process
Our investment universe comprises US stocks listed on NASDAQ, the NYSE and NYSE American with a market capitalization below USD 100 million and a share price between USD 2 and USD 50. SPACs and ADRs are excluded.
Candidates are examined daily against defined criteria. In doing so we combine fundamental information with price and volume data, statistical models and machine learning methods. The models are updated regularly and reviewed before they are deployed.
The strategy is geared to short-term trading. Positions are in principle closed within the same trading day, so the average holding period is under 24 hours. Based on historical trading frequency, this results in roughly 300 trades per year. At the same time, the number of positions held in parallel is limited to a maximum of 16.
The combination of systematic pre-selection, standardized trading rules and short holding periods is intended to allow a consistent implementation of the strategy.
4. Risk management and capital preservation
Risk management is an integral part of our trading process. For every position, rules on position size, stop-loss and profit target are defined in advance.
According to the strategy paper, the intended risk per position is limited to a maximum of 6% of total capital. When the risk of extreme price moves is elevated, position sizes are reduced.
These rules are intended to manage loss exposure systematically. They do not guarantee, however, that a trade can actually be closed at the intended stop-loss price. Particularly with illiquid stocks, price gaps and exceptional market moves, execution prices can deviate considerably from the planned levels.
In the historical backtest, the maximum drawdown was 35.96%, occurring between November 2024 and May 2025. This figure shows that even a rules-based strategy can suffer substantial interim losses.
In addition, investors who measure their results in Swiss francs are exposed to currency risk: trading takes place in US dollars without systematic currency hedging.
With short positions it must also be borne in mind that losses can theoretically be unlimited if the share price rises sharply. A complete loss of the invested capital is possible.
5. Historical results and implementation to date
Backtest
Over the period from 1 January 2021 to 2 June 2026, the strategy achieved, according to the strategy paper, a cumulative return of 5,437.1%. The reported average annual return is roughly 109.8%, with a Sharpe ratio of 2.14.
For comparison, the S&P 500 achieved a cumulative return of 105.6% over the same period. The strategy posted a positive result in every calendar year of the period examined but lagged the benchmark in 2021 and 2024.
These figures describe the results of the historical simulation only. Their informative value depends, among other things, on the underlying data, the model assumptions, the assumed trading costs and how realistically order execution is represented.
Results in live trading
For calendar year 2025, the strategy paper reports, as of 29 October 2025, a risk-adjusted annual return of 71.3%, confirmed by the broker Cobra Trading. The S&P 500 achieved 15.8% in the corresponding comparison.
During the launch phase, trading was carried out with reduced position sizes. The realized profit reported for 2025 amounted to USD 14,053.
The strategy paper also points out that the backtest results for 2025 were considerably above the realized live result. It cites differences in actual trade execution as the main explanation.
Comparing simulation with live trading is an important part of assessing a quantitative strategy. Historical simulations and actual trading results can only be meaningfully compared, however, if in particular the period, capital base, position sizes, costs and calculation methodology match.
6. Trading infrastructure and compensation model
Trading activities are executed through Cobra Trading, a US broker focused on active short trading.
Under the model described, no fixed management fee is charged. Any performance-based compensation is determined individually within the respective profit-participating loan agreement.
The specific economic terms depend on the contractual basis agreed in each case. Prospective investors should review it in full before making capital available.
7. Limits and legal framework
The figures and methodological explanations presented are intended to give a transparent view of our quantitative approach. They do not replace an independent review of the strategy, its risks or the contractual terms.
In particular:
- Historical results are not a forecast: Neither backtest nor live results guarantee future returns.
- Model and execution risks remain: Statistical models can lose their explanatory power, while liquidity, short-selling availability and actual execution results can affect performance.
- Capital losses are possible: The strategy can cause substantial losses. With short positions, these can exceed the capital originally invested.
- Legal status: According to the structure described in the strategy paper, Defy Capital is not a FINMA-regulated financial institution. Activities and contractual relationships are governed by the respective agreements in force and applicable law.
This article is for information purposes only and constitutes neither investment advice nor an invitation to buy or sell financial instruments or to make capital available. Our Terms & Conditions apply.
The full strategy paper
The full strategy paper contains a more detailed presentation of the trading methodology, risk management, historical results and underlying assumptions.