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CTA Spotlight: Raithel Investments, Inc. - Target Volatility Program
July 23, 2007
As we've mentioned throughout the summer - we hope you have logged into the Attain website recently and seen some of our new recommended CTA programs. Check out our list of top performers by Clicking Here. We have been busy researching these managers and performing our due diligence, and several are quite appealing across not just performance, but also what they trade, and how they trade it.
The next "new" CTA we would like to highlight actually has a performance track record going back to 2000, and had only a single losing month out of 48 months in the four years between 2003 and 2006. (Past Performance is not necessarily indicative of future results). That is the kind of consistency investors crave, and that is the kind of consistency the subject of this CTA Spotlight, Raithel Investments, Inc's Target Volatility Program., strives for.
Who is the Manager?
The manager of the Target Volatility Program is CFTC and NFA registered Commodity Trading Advisor Raithel Investments, Inc. Raithel was incorporated in 1993, and is owned and operated by John D. Raithel and his son, Bryan.
John Raithel has been around the investing industry for nearly four decades, getting his start in the Investment Dept. of General American Life Insurance in 1969. Since then, John has worked as the Sr. Portfolio Manager in the Options and Futures Group at Chase Investors (of Chase Manhattan Bank), the Director of Fixed Income at First Union National Bank (now Wachovia), and the Chief Investment Officer for the Pilgrim Group, a Los Angeles based mutual fund company.
John D. Raithel received a B.A. (Math) and an M.B.A. (Finance and Statistics) from Texas Christian University. He became a C.F.A. (Chartered Financial Analyst) in 1975 and an A.S.A. (Associate of the Society of Actuaries) in 1980. He has been married to his wife Barb for over 40 years, has two children, Gina and Bryan, and one grandson Daniel.
Bryan J. Raithel joined Raithel Investments in January of 2007, after working 10 years at The Vanguard Group. There, he worked in various positions assisting high net worth clientele and in a management capacity in their Financial Planning Department. Bryan is a Certified Financial Planner (CFP) with an MPA from East Carolina University. He is married to his lovely wife Collette and they are expecting their first child in November.
Both Bryan and John live near each other in Cornelius, North Carolina, just north of Charlotte. John enjoys watching the views of Lake Norman from his backyard and Bryan spends his extra time on home projects in preparation for his baby.
How does the Program Work?
Raithel describes how their program works with two simple words - Market Neutral. The Target Volatility Program trades options on the S&P 500 stock index futures, but is not a market directional or trend following system. In the manager's words - "[it] can be useful as additional diversification for a sophisticated portfolio" The program has the ability to be successful regardless of direction of the S&P futures, up or down. Like any non correlated investment, the flip side of that of course, is that it has the ability to be unsuccessful regardless of the direction of the stock market.
Raithel's program is designed to sell volatility in the S&P Futures market through the use of short option strangles. Call and put options are sold at different strike prices above and below the predicted trading range. This is called an option strangle, as you don't want the market to go outside of the area you are "strangling" with your calls on one side and puts on the other. If the market remains within the expected range and does not produce a strong move in either direction then the options sold will expire worthless and the trade will be profitable.
While S&P 500 futures have just four contract months, Mar.,Jun., Sep., & Dec. - there are options on the S&P 500 futures for every month of the year, and Raithel sells a strangle each month of the year in succession - hoping the current month's options expire worthless and then putting on the next month's.
To determine where to sell the calls and puts (strangle) on the market each month as volatility and prices increase or decrease, that is - at which strike prices for the calls above the market and puts below the market, Raithel uses a quantitative trading system based on their own measures of volatility to gauge the current trading range and where market prices are not likely to go in the next month.
The strike prices Raithel enters into position at are generally about 7% away from the current market prices, and range form 5% to 12% away. This gives positions a nice buffer should market prices move significantly over the course of a month. If positions do come under pressure and the market approaches a strike price, Raithel's exit strategy involves covering the position at 1.5 to 8 times the original price of the options sold; with the exit varying depending upon our own volatility measures.
The goal of the Target Volatility Program is to outperform the S&P 500 index with a lower standard deviation of returns. In working towards this goal, Raithel attempts to limit trading costs by letting over 95% of options sold expire worthless. Should the market have other plans, however, and pressure positions, in Raithel's words: "We react, and never anticipate....[and don't] “double up” when the market’s volatility turns against it. We avoid subjectivity, stay disciplined to the quantitative system we have developed, and we don’t modify positions intra-month unless they hit a pre-determined exit point.
July 20th: S&P 500 futures price = 1545.10
|Sell 5 August 1650 calls at .30, = $375 credit|
|Sell 5 August 1425 puts at 4.00 = $5,000 credit|
Total Credit of $375 + $5,000 = $5,375
August 17th: S&P 500 futures price = 1505.00
|Both the Calls & Puts Expire Worthless, effectively buying them back at $0|
|Gain on Trade = $5,375 Credit - $25 commission*10 = $5,125.00|
$5,125.00 = +5.13% on $100K minimum investment.
Like many CTA programs, there is more to the Target Volatility Program than meets the eye. Many people will likely look at Raithel and see a 19% return with a 14% Drawdown, only a 4% return thus far in 2007 - and not be overly impressed. But when digging a little deeper - there is an interesting story here.
Particularly interesting with this program from Raithel is the impressive streak of 53 out of 54 months profitable (98.15%) from August 2002 through January 2007. As it turns out - Aug. 2002 was the exact time that Raithel changed their program slightly to concentrate on strike prices further away from the current market level. As always, past performance is not necessarily indicative of future results. This change resulted in a much more consistent level of performance more similar to the now closed to new investors - Zenith Resources Index Option program.
As for the below average performance so far this year - we actually don't mind seeing the losses in February and March which caused it. Nearly every option selling program suffered in February and March of this year following the volatility spike Feb., and to have managed the losses (just a 9% DD ) and already have gained them back says a lot about Raithel's risk controls and consistency.
If you are looking for a program with low drawdowns, consistent monthly returns, and a lengthy track record to back it up - Raithel Investment's Target Volatility Program should be on your list.
IMPORTANT RISK DISCLOSURE
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US Stock futures finished lower last week after a round of profit taking on Friday. Last week SP futures fell -0.96%, Dow futures were down -0.25%, while NASDAQ futures finished a bit higher at +0.42%. Smallcaps also moved lower with Russell 2000 futures falling -2.08% and SP Midcap 400 futures losing -1.10%.
Treasuries climbed higher as stocks fell, with US Bond futures gaining +1.34% and 10 year note futures climbing +1.03%. In currency trading the US Dollar fell again against the Euro, British Pound, and Yen. For the week the Dollar Index was down -0.30% while the Pound was up +1.04%, the Yen climbed +0.54%, and the Euro moved slightly higher at +0.22%.
In commodity trading the grain markets continue to be very volatile due to a bearish weather outlook. Both the Corn (-9.50%) and Soybeans (-7.75%) were hit hard while Wheat only fell -0.72%. The grain selling spilled over to the Cotton market which also fell drastically losing -8.28%. However, Sugar (+4.36%) and Coffee (+3.87%) climbed higher for the week.
Other markets in the news include Crude Oil which was up +2.24%, Natural Gas fell -3.65%, RBOB gas lost -2.25%, Copper climbed +3.13%, Gold was up +2.61%, Silver gained +2.23% , and Platinum rose +1.44%. Finally Lean Hogs were up +4.73% for the week due to rumors that the Chinese were looking to import US hogs.
***Commodity Trading Advisors (CTAs)***
Heading into the last 7 days of trading in July - CTA investors are seeing a mixed bag of performance across the spectrum of Index/Commodity option sellers, trend followers, and spread trading.
Advisors currently sitting at the top of the performance spectrum for July include Ascendant - which is ahead approx. 5% (thanks to another successful option expiration last Friday), and Dighton - which is ahead approx. 6% for yet another NEW EQUITY high for the program. Other advisors that benefited from last Friday’s Index option expiration included BC Capital and Zenith. For other option sellers the long July expiration 5 weeks vs 4 weeks has them playing End Of Month options and or extending their potions out to August and September.
One market segment that has struggled of late is the Commodity spread traders; in particular the mangers with exposure to the Agriculture markets (i.e NDX Capital and Chicago Capital). Both mangers are down on the month between 3 and 7% respectively based on an unexpected announcement out of China banning the import of certain US pork and poultry products coupled with an expected increase in their demand for the 2 products. The combination of a potential increase in overall supply and increased demand by China had a negative impact on the short term cash and futures prices while longer term prices were not nearly as affected. As a result of the above it is likely that we will see the various mangers start to roll out to further contracts.
To view each CTA’s June performance, here is the link: http://www.attainaccess.com/cta
***Day & Swing Trading***
Stocks retreated from their recent highs last week after investors digested a slew of economic data, earnings reports and M&A activity. The first half of the week was spent on either side of the unchanged mark and then moved into negative territory on Friday with the Dow dragging down the broader market.
Day trading systems struggled with the choppy conditions in the first four trading days, and then Friday’s decline was too little too late for most of them to finish profitable. Swing systems that are holding short equity or long bond positions added some open trade profits.
As previously mentioned, profitable day trading systems were few and far between but BetaCon 4/1 ESX was able to escape the week with profits of +$646. Impetus eRL was the only other day trading system to stay above water with profits of +$119. OPXP eRL had three trades for a loss of -$430- two were stopped out at breakeven and one for a full stop. Waugh eRL cooled off a bit from the week prior with a loss of -$541 on two trades. Finally, Compass SP’s winning streak came to an abrupt end with losses of -$3,700 on three trades.
Ultramini YM was the cream of the crop among the swing trading systems with profits of +$1,285 last week. The system reversed short on Monday to lock in profits on the long trade and then watched its short position turn positive after Friday’s sell-off. Seasonal ST eRL and ES bounced back last week with profits of +$840 and +$715 thanks to a one-day short trade on Thursday that was exited on Friday’s close. Mesa Notes tacked on +$578.12 on its long position in the ten-year notes.
Elsewhere, the Tzar suite of systems was profitable across the board despite having mixed positions. The eRL and ES made +$480 and +$12.50 on their short positions while the NQ made +$375 on its long trade. Spartan ES struggled to find direction and reversed short for a net loss of -$442.50. Jaws US 60 had one short trade that was stopped out for a loss of -$541. Finally, Adaptive Euro Index cooled off with a loss of -$1,167.01 for the week. .
Another week of upside gains were seen in the rate futures sector with most rates nearing or exceeding 2+ month highs during the past week as continued support stemmed from the sub-prime mortgage debacle along with weaker than expected economic data, especially in the housing sector. Currently long term trend followers remain in a down bias despite the rally last week - as Aberration is short the Sept. Bund currently making +1,490.00 Euros (open trade) as well as a short Sept. TY position with a current gains of $343.75 (open trade).
The U.S. dollar and Japanese Yen again drifted sideways to lower against the major European currencies during the past week as news of strong economic data in Europe coupled with weaker economic data in the U.S. kept markets as levels not seen in 4+ years. Long term trend followers remain mostly on the sidelines due to choppiness and volatile swings, although Aberration is short the DXU currently showing a $350.00 gain (open trade).
The action in soft commodities last week was volatile as the grains and oilseeds, especially corn and soybeans were hit hard on improving weather conditions in the U.S. The wheat market held its own versus the other sectors and neared 11+ year highs as crop problems worldwide continue to spark worries that supplies will become dangerously tight heading into the southern hemisphere harvest this winter. Action in the livestock sector was firm as news of Chinese interest in U.S. meat, especially pork sent prices into orbit. Aberration is currently long BOZ making +$2774.00 (open trade), long CTZ losing $1040.00 (open trade), long KWU making $2312.50(open trade) and short CZ making +$625.00 (open trade).
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.