Very interesting topic. I´ll describe it as detailed as I can.
Question usually sounds something like this:
“I invest 1200 EUR for 12 months. After 6 months, fund performance shows 50% return on capital, so my investment should be worth something about 1800 EUR. In next six months ROC is again 50%. My investment shows to be worth 2400 EUR. Why not 2700 EUR? Why can´t you use compounding on my investment?”
Compounding is already included in our calculations. It´s inseparable part of the money management inside the fund. In fact, without compounding we would be hardly able to reach such levels of profit. In terms of money, if 1% daily profit on 1.1.2016 (at the beginning of your imaginary investment) could be 12 EUR, on 31.12.2016 (the last day of your imaginary investment) 1% daily profit could represent earnings of 14 EUR.
Money come and go through the year, fund works as a whole, the value of your investment changes day by day, either by profit/loss or amounts of money coming in/leaving the fund on particular day.
Next and the most important thing is protection of your capital. If the fund is overperforming in the early stages of the day, it slows down at the dawn. No chasing profits. Same happens within the week, month, year. If any time period looks to be overperforming compared to standard statistical model or simulation, capital protection becomes prevailing strategy. All within the principle of regression to the mean.
If you have any questions regarding this topic, don´t hesitate to contact us by email at [email protected]