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CTA Spotlight: Attain Portfolio Advisors' Strategic Diversification and Modified Programs
September 17, 2007
A quick look at the top 5 ranked CTAs at Attain over the past 12 months shows a name in the #2 slot that should be familiar to most readers of this newsletter. That's right, it's us - Attain, and our registered Commodity Trading Advisor, Attain Portfolio Advisors.
This month's CTA spotlight is on our own Attain Portfolio Advisor programs: the Strategic Diversification Program & our new Modified Program
Who is the Manager?
As mentioned above, the manager and creator of the Strategic Diversification Program is none other than the Attain Capital Management staff and principals.
Attain, the brokerage firm, was founded on the belief that a diversified portfolio of computerized, automated trading systems could consistently out perform the "Buy and Hold" stocks mentality most investors adhere to.
But not content to merely "say" that a portfolio of systems could do well, we wanted to "put our money where our mouth was" so to speak, and in 2004 created Attain Portfolio Advisors, LLC to directly manage individual client accounts with some of the very same third party trading systems our brokerage clients were trading.
But which systems to trade, how much to risk on them, and in what combination are, as they say, the hard part. And behind those endless calculations and formulas are Attain Capital CEO and founding partner Jeff Malec, and former Attain Capital client Dr. Jack Parker.
Jeff Malec started Attain Capital with co-founder Walter Gallwas in 2002, and is the lead investment manager for Attain Portfolio Advisors. Mr. Malec has spent his entire career in the futures industry, starting in 1997 as a clerk in the Treasury Bond pit at the Chicago Board of Trade. Mr. Malec holds the Chartered Alternative Investment Analyst ("CAIA") designation.
Jack Parker (PhD) joined the Attain Portfolio team as director of research and development, and remains responsible for trading system design and testing - having developed numerous models for the program. Dr. Parker has served in numerous academic, government, and private sector positions over the last 25 years involving research and application of advanced stochastic and numerical models.
How Does the Program Work?
Our flagship Strategic Diversification Program utilizes a unique multidimensional diversification approach in which different markets, strategies, and time frames are combined to reduce the inherent risk associated with each of those investment facets.
Market diversification is achieved by trading positions across a wide range of global markets and market groups. These include over 50 global markets across stock indices, bonds and financials, currencies, energy futures, industrial and precious metals, and various agricultural products. Limitations are placed on each market group, or sector, so that no one sector can risk more than a certain percentage of the entire portfolio.
Our strategy diversification is achieved through utilizing dozens of different models for the trading of the various markets. In many cases, several different models are operated on a single market or market group, allowing for several different set ups to overlap and "confirm" the signals issued by any one model, or for several different set ups to conflict, thereby offsetting existing positions and reducing risk. We also employ a ranking system for our short term models which allocates capital to those models performing the best within certain risk constraints, while removing capital from those models which are not performing, or have become too risky.
Our time frame diversification is what we believe really sets Attain apart from other managers. The trading is split roughly into thirds, with 1/3 trading long term models which hold positions for months at a time, 1/3 trading intermediate term, or swing trading, models which hold positions for days to weeks, and the final 1/3 trading short term, daytrading models which are in and out of positions by the end of each trading day.
Overlaying each level of diversification is an overall individual position filter which does not allow any one position or trade to risk more than 1% of the portfolio, and an ongoing individual model filter which does not allow any one model to lose more than a certain percentage of the entire portfolio and removes any models which deviate substantially form their historical norms.
All models are mechanical, computerized, and technical analysis based.
Our newest model was launched in February 2007 to meet the needs of one of our clients, and is offered at this time only to Qualified Eligible Persons (QEPs) through the CFTC Rule 4.7 Exemption.
This model was developed in response to our client's desire to trade our main program, but keep margin requirements below $75,000. The latter wasn't possible with the full portfolio, which can reach margins up to $200,000 - thus a modified portfolio was constructed while striving to retain the multidimensional diversification attributes of the main program. The end result was average daily margin of approx. $40,000 to $60,000.
The modified portfolio thereby trades in much the same manner as the main program, diversifying between markets, strategies, and time frames. It just does a fewer number of contracts in each market and utilizes several electronic e-mini markets where available, thereby reducing margin. It also removed several high margin contracts like Heating Oil and Natural Gas from the portfolio.
Because of the lower initial capital amount, there is more risk (and reward) inherent in this program, and the volatility is likely to be about twice that of the main program. This is due to some of the models in the modified portfolio doing a minimum of one contract on their signals, when the normal risk sizing would have them doing less than one contract, and therefore risking more than the 1% maximum risk per position possible in the main program.
The Modified program will therefore be a little less diversified than its main program brother, and skewed slightly towards those positions and models which have higher risk and higher reward potential.
We were hoping to add comments to this section from actual clients of APA as we felt this would provide a unique perspective on this program. Unfortunately we did not receive the responses by press time and we're forced to try and write objective comments about our own product. Is there a conflict of interest here? Definitely. But we will try our best to be impartial. So without further ado let's examine the strengths and weaknesses of the Attain Portfolio Advisors - Strategic Diversification Program.
First for the strengths: Objectively speaking the combination of long term trend following, swing trading in the stocks and energy markets, and day trading stock index futures has produced a remarkably smooth equity curve. With an average annual rate of return of 9.50% and a max drawdown of 8.35%, the overall trading plan focused on a mix of strategies rather than just one trend following strategy or option trading method is proving to be successful. Here is an example of some of the positions a client could expect to see in their account:
Short Natural Gas
Long Natural Gas (taking acct net long)
Long Emini Crude Oil
Long Emini Russell 2000
Short Lean Hogs
Short Hang Seng Index
Buy and Sell S&P 500 for 5 points profit-flat at end of day
Another strong selling point is that APA has now surpassed three years of live trading which is paramount for and CTA or trading system. As we all know the next best trading strategy with great hypothetical returns is always tempting to trade, even with high returns that are seemingly too good to be true. However, in comparison, those programs that have been around the longest that are usually the most consistent performers. With three solid years of performance APA has definitely passed the consistency test.
Of course even though the program has been remarkably consistent it hasn't exactly been a high flying alternative investment product with 30% and 40% returns. In fact one could argue that a buy & hold strategy in the SP 500 has been a better investment (albeit with a much higher drawdown) over the last 36 months. Another negative is the number of trades per million per year that the program currently has. A fair amount of trading is necessary in this program due to the various strategies traded. This is a concern and is something we have a close eye on as well.
For the more aggressive investor looking for the higher returns, one facet of the program we find attractive is Attain's low margin to equity ratio. Basis a 1 Million dollar minimum, Attain's margin to equity ratio is 6-12% on an end of day basis and as high as 10-20% intraday. Traded with notional funds of 500k or 2x the program has an Average return of 19.1% with drawdowns of 16.7%.
If you are looking for a well diversified program with low drawdowns, consistent monthly returns, and a nice size track record, we suggest checking out the Attain Portfolio Advisors - Strategic Diversification Program.
IMPORTANT RISK DISCLOSURE
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Stocks were up slightly last week as traders are expecting the FOMC to lower the fed funds rate by at least - 0.25% or 25 basis points tomorrow. Typically a rate cut is seen as good for the stock market due to its positive implications in the credit markets. SP futures finished the week up +1.71% while NASDAQ futures were up +1.56%. The smallcaps climbed slightly higher with Russell 2000 futures gaining +0.45% and SP Midcap 400 futures climbing +0.76%.
Bonds and currencies were quiet ahead of this week's announcement. The Euro did manage to climb to all time highs against the US Dollar as the ECB raised interest rates. For the week Eurocurrency futures were up +0.73%, Dollar Index futures fell -0.35%, and Japanese Yen futures dropped -1.71%. In bond trading 30 year bond futures fell -0.41%.
Energy prices rocketed higher last week as storms continue to brew in the Atlantic and political tensions rise in the Middle East. Crude Oil futures were up near all time highs after climbing +3.47%. Natural Gas futures had a big week gaining +12.11% while Heating Oil futures +2.90% and RBOB Gasoline futures were up +2.26%.
Other big commodity market moves last week include Copper which was up +4.34%, Gold was up +1.14%, Palladium fell -2.07%, Soybeans gained +5.47%, Coffee climbed +3.42%, and Cotton was up +5.58%.
***Commodity Trading Advisors (CTAs)***
With 1/2 the month gone and 1/2 the month to go here is a quick glance at what has transpired for CTAs so far and where we are heading for the remaining 2 weeks.
Topping the charts for the month is none other than Dighton USA. Dighton has gone on to hit another NEW equity high following their most recent drawdown of -36% midway though August. A rough estimate has Dighton up more than 20% so far in September proving once again that their strategy is an ideal candidate for investing when drawdowns fall into the 30% range (past performance is not necessarily indicative of future results) as discussed in last week's newsletter.
Other managers that are ahead for the month include most SP Index Option sellers (Zephyr, Zenith, BC Capital, Diamond, Ace Investment Strategist, and Cervino Capital). Noting the narrow index range + heightened option premiums (vega) over the past 3 weeks managers have been able to collect higher premiums on further out of the money strike prices. With option expiration this Friday most managers stand to lock in their gains assuming no major shocks between now and then.
We also like to note that the agriculture spread trading managers are also pushing ahead to the upside this month with the most impressive gains coming out of NDX. NDX Abednego is up approximately 5% for the month and Shadrach is up approximately 10%. Meanwhile Chicago Capital is ahead +0.2%.
In other trading, after earning +4.7% in August, FCI is currently down approximately 2% for the month to date. The early strain on their trading has come from the soaring Wheat and Energy markets. The current Wheat options are set to expire this Friday and several Crude options expired today. FCI attempts to keep their monthly drawdown, under normal conditions, to a maximum 5% on the portfolio for the month across all positions + manages the risk of each underlying commodity.
To view the most recent performance on our recommended CTAs please use the following link: http://www.attainaccess.com/cta.
***Day & Swing Trading***
Trading activity was significantly slower last week as traders geared up for the FOMC meeting this Tuesday. Day and swing systems underperformed as equities struggled to find direction. Stock index volatility is still above average but down significantly from mid-August.
For the day trading systems, Kappa Dax was the only system to finish in the black with profits of +$1,637.85. BetaCon 4/1 ESX and Dax lost -$113.05 and -$381.05 respectively. OPXP eRL lost -$710 on two trades both of which were stopped out. Waugh eRL lost -$790.01 on a trio of trades. Keystone eRL lost -$2,190 after getting caught on both the long and short side. Finally, Compass SP lost -$2,350 on three trades.
Swing traders fared a little better on the whole. Ultramini YM made +$720 on two trades. Mesa Notes TY exited a short trade for profits of +$668.75 on the week. Ultramini ES had one short trade for a gain of +$632.50 on the week. Mosaic eRL had ten trades for profits of +$464. Tzar eRL held onto its short trade for a gain of +$170 on the week.
On the losing side, Adaptive US lost -$70 and is holding long in the eRL (2) and YM. Signum TY lost -$718.75 in open trade equity. Tzar ES lost -$852.50 after reversing long towards the end of the week.
The U.S. Dollar again headed to multi year lows last week as a slowing U.S. economy and ideas that near term interest rates will head lower prompted foreign investments to look for a higher yield elsewhere. The Yen carry trade unwinding subsided some last week with the stabilizing tone in global stock markets sparking some correction pressure in the currency. The Euro zone currencies firmed the most due to strong economic reports. Economic releases in the U.S. this week continue to be on the light side, but there will be key reports on the inflationary growth of the U.S. economy which could set the tone for weeks to come. Long term trend followers remain in a mostly neutral stance, although Aberration did establish a new short DXZ position currently losing -$210.00 (open trade).
Rate futures opened last week posting new 8+ month highs, but the rest of the week was spent in a correction phase as position squaring ahead of the FOMC meeting and risk liquidation were seen after equity markets firmed up. The recent sector surge was sparked by global stock market jitters, but that seemed to fade during the past week as equity markets stabilized.The upcoming week's economic releases are light, although key inflation readings could give a hint to whether or not the current trend continues. Long term trend followers are moving to a more positive bias as Aberration is currently long TYZ with a current gain of +$546.88 (open trade) and Long the Dec Bund with a loss -$430.00 (open trade).
Soft commodities were fixed in a sideways to lower trade last week as corrective pressure was seen in most sectors after recent strength. The wheat market experienced the largest decline, although tight supplies and strong world consumption should continue to keep prices supported after the correction. Soybeans did post gains due to signals of a shrinking crop by the USDA, although gains were tempered by the reluctant price action in corn which is well supplied due to the start of the U.S. harvest. The livestock sector was weaker on lower cash and product markets, although rumors remain that China could buy extra pork product to add to their tight freezer stocks. Look for underlying support in the grains and oilseeds to continue on worries of world crop problems for wheat and ideas current row crops will not meet big expectations. Aberration is currently long KWZ making $6987.00(open trade), short CZ making +$75.00 (open trade) and entered into a long BOZ trade with gains of +330.00 (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.