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CTA Spotlight: Rosetta Capital Management

February 11, 2008

 

Last week’s newsletter described Attain’s CTA performance tables and the ranking system used by Attain to measure over 400+ CTAs across 25 categories. Those programs which are consistently among the top ranked in each category earn a higher ranking, and the top ranked CTA (not closed to new investors) amongst Attain’s recommended list is the subject of this month’s CTA Spotlight.

This month’s CTA Spotlight is on fundamental Ag and Meats trader - Rosetta Capital Management.

Who is the Manager:

The Rosetta program is run by two futures industry veterans, Jim Green and Michael Swinford, with backgrounds in not just the futures markets, but the physical commodities themselves. They launched Rosetta Capital Management in 1997, but have been in the commodities industry for a combined 50+ years.

Mr. Green gained farming experience early in his life, growing up on a grain and livestock farm in Henderson County in Western Illinois, before starting in the commodities business with Heinold Commodities in 1979.

Mr. Swinford was raised in Windfall, Indiana, located in the north central portion of the state. He spent many years working on the family grain and livestock farm, and was in charge of the farm for 5 years following his father’s death. He has likewise been in the commodities business his entire career, having started with Heinold Commodities in 1971.

After a few different stops for both gentlemen, they both ended up in the Livestock Division of Rosenthal Collins Group, one of the largest Futures Commission Merchants. Jim Green the manager of the group, while Mr. Swinford is the Senior Livestock analyst.

When not managing Rosetta, both gentlemen enjoy their Chicago baseball, with both Cubs and White Sox season tickets.

How does the program work?

Rosetta's trading strategy is somewhat different than many CTAs Attain recommends, in that it is mainly based on fundamental, not technical, analysis. Fundamental traders look at such things as weather patterns, economic reports, and factors likely to affect supply and demand – versus technical traders who look at oscillators, moving averages, and the like.

However, Rosetta does augment their fundamental analysis with some technical overlays using oscillators, moving averages and support and resistance levels. If the fundamental and technical side line up, a trade is very likely. As with most fundamental traders, Rosetta’s trades are 99% discretionary, meaning the fundamental or technical factors can be overridden by the manager at any time as they see fit.

While Rosetta leaves the door open in its D-Doc saying they monitor over 40 global markets – the truth of the matter is that a majority of their trading is focused on the Grain and Meat markets, as that is where the experience of the managers lay.

The goal of their trading strategy is to capitalize on short term trends in each market they look at. But how they go about capturing those trends can change depending on the market.

In very general terms, grain market trading is traditionally very directional and falls in line with the trend eventually. This leads to Rosetta usually taking outright futures positions, either long or short, when trading the grain markets. It is important to note that Rosetta is not a 100% Spread Trading CTA, as they are often incorrectly labeled.

On the other hand, the meats markets can be somewhat volatile and non "trendy". And for this reason, the majority of Rosetta’s meat market trading emphasizes the use of spreads.

Spread Trading is the simultaneous purchase and sale of something very similar, economically speaking. In commodity markets, that usually means buying one contract month of a market while selling another contract month of the same market. For example, buying July 2007 Corn futures and selling December 2007 Corn futures is a spread trade.

Depending on whether you buy or sell the spread - the goal of a spread trade is for the difference between the two sides of the trade to either get further apart or closer together. In our example above, you would want either July Corn rising faster than December Corn does, or December Corn falling faster than July Corn.

In Europe - Spread Trading means something completely different, with it being another name for spread betting. Spread betting is essentially how mainly UK citizens can go short stock, indices, etc., as tax and other laws make it prohibitive to short stocks as we do here in the US. Spread betting should not be confused with spread trading as we are discussing it here, as they are completely different.

Trade Example:

Spread - Long July Soybeans / Short Nov Soybeans

Entry price = $0.58

Price on 2/11 = $0.72

Open trade profit = $700.00 x 2-3 contracts per 100k

Reason for the trade (remember they are fundamental traders) - Weather (too much rain in Northern Brazil and not enough in Southern Argentina), Supply (Near month prices cannot count on US production for 2008/2009 until supply is known so prices are expected to continue to rise), Supply (Long term the US supply is likely to be even greater in 2008 which could send the November prices lower).

Attain Comments:

Being ranked 2nd amongst Attain’s recommended CTAs on all time, 36 month, and 5 year data is reason enough for Rosetta to be spotlighted today. But what we really like about the program is the diversification it can provide a portfolio.

With the bulk of their trading concentrating on the agriculture and meat markets, their performance is pretty well insulated from the gyrations of the stock markets, which have become pretty wild over the past few months. As we've said in this space before, the best way to diversify away from the stock market is to invest in something that has nothing to do with stocks. The closest Rosetta is likely to get to stocks is a stockyard.

Statistically, the Rosetta program has some very good overall stats, but it is really only the past three years we are focusing on at Attain. That is due to the fact that Rosetta managed only a single large account for the first 4.5 years of their track record (Apr '00 to Oct. '04).

There is nothing wrong with that, of course, but it pays to put more emphasis on the performance since Oct. 2004, when Rosetta was managing accounts similar to what you may invest - in $50,000 blocks.

One interesting note about Rosetta which gives Attain more confidence in their future prospects and pedigree is that co-manager Mr. Swinford is also registered with Kottke Associates, whose Swinford program bears his name. This doesn’t happen all that often, one man having input on two separate CTA programs, but it is a nice bit of 'out of sample' data for investors to gauge Mr. Swinford’s skill. See the performance here: http://www.attaincapital.com/alternative-investment-performance/managed-futures/detail/684.

The Rosetta program is a 4.7 Exempt program, meaning it is eligible to Qualified Eligible Persons only.

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Grains Explode to upside, Stocks sell off again | Chart of the Week

***Overview***

US Stock futures fell drastically last week after Federal Reserve Chairman Ben Bernanke hinted the Fed would return its focus to fighting inflation. According to some traders and analysts this could signify the end of the stock market saving rate cuts that we have seen over the last few months. Stock futures end the week in the red with SP 500 futures falling -4.78%, NASDAQ futures were down -4.67% and DOW Jones futures lost -4.54%. In Smallcap trading Russell 2000 futures fell -4.51% and SP Midcap 400 futures lost -3.71%.

As expected the US Dollar benefited from the remarks gaining +1.66% while Eurocurrency futures fell -2.43%. Swiss Franc futures -1.21% and Japanese Yen futures -0.91% also moved lower. In treasury trading; US 30 year bond futures fell -0.89% while the benchmark 10 year note futures finished the week nearly unchanged.

In commodity trading; Grains, Metals and Energies all rallied higher last week. Wheat had the largest move climbing an unbelievable +15.90% after 5 straight days of limit up trading last week. Elsewhere in the grains Soybeans were up +4.02% for the week and Corn traded +1.50% higher. Metals were also up huge with Copper +8.14%, Platinum +6.43%, and Palladium +5.71% all enjoying large rallies. Gold +0.95% and Silver +1.42% also traded higher. Energies weren’t ready to be left behind as Crude Oil +3.16%, Heating Oil +4.30%, RBOB Gas +3.23%, and Natural Gas +7.25% all traded higher as very cold temperatures swept across the country. Finally other markets on the move include Coffee +5.68%, Sugar +2.83%, Cotton +1.36%, Live Cattle +1.12% and Lean Hogs -2.70%.

***CTAs***

Coming off a wild January and volatile start to February for both stock and commodities, here are a few estimates on several CTA's programs (plus an update on PFG K3 FX)

The top performer so far in February is Attain Portfolio Advisors Modified program which is ahead approximately +7.5% through the end of last week. The strategy was under pressure at the end of January with several short stock index positions across different time frames; however the program was able to exit some of those positions with stocks down, as well as benefit from run ups in bonds and commodity markets.

Other top performers so far have been Dighton USA which is ahead aprox +3.8% after returning 9.2% in January, NDX Shadrach +3.79%, Wallwood FX +3.3%, Attain Strategic Diversification Program +2.5%, and Ascendant Strategic 1 +2%.

On the other end of the spectrum the continued gyrations in the currency markets have caused for some larger than expected drawdowns in the PFG K3 FX program which is down -10.32% to start the month. This drawdown from Friday pushes the program's drawdown right to the 2x historical drawdown level (aprox -20%). As with any trading strategy, we expect to see drawdowns and typically recommend allowing up to 2x the historical level. For anyoninvested in the strategy, please let us know your line in the sand and we can work to alert you if and when these levels are hit. For anyone looking to buy into a drawdown it's possible that this could be one of those unique opportunities to buy on the cheap.

Finally many of the index option selling CTA's have had a quiet start to the month based on the fact options are set to expire this week and many mangers have positions deep out of the money following the January market action.

***Day & Swing***

A sharp decline in global stock markets and the corresponding volatility in treasuries last week helped the majority of the swing trading systems. Because several of the moves occurred in overnight trading, the majority of the day trading systems did not fare as well as their swing trading counterparts because they were either selling the low or trying to buy the bounces that didn’t materialize into full recoveries.

PGA and PGA PowerGrowth2 were the top performing systems last week with profits of +$6,410 and +$5,300 respectively. Both PGA and PGA Powergrowth2 trade a portfolio of markets that include ES, eRL and NQ but with different combinations. Last weeks profits came in the form of both open and closed trade profits from short trades. The Tzar suite of systems had similar results of +$3,675.57 in the NQ, +$3,337.50 in the ES and +$3,300 in the eRL.

Profits were not limited to systems swing trading stock index futures as bond systems came alive as well. Jaws US 450 and Jaws US 60 both had profitable short trades last week and made +$1,494.50 and +$1,368.50 respectively. Mesa Notes came into the week long and reversed short for a net gain of +$809.37 for the week in open and closed trade profits. Signum TY and EBL were roughly break-even for the week and continue to hold half of their long position.

On the losing side, Ultramini YM and ES both were in the red with losses of -$530 and -$580. SeasonalST ES also lost -$3,492.50 after exiting a losing long trade only to re-enter long later in the week.

For the day trading systems, Waugh eRL was the top performer with profits of +$974.44. RT Viper was close behind with profits of +$820 on four trades. BetaCon 4/1 ESX had two trades for a gain of +$503.18.

Elsewhere, Omega3 v1 Dax lost -$61.80, Compass SP -$90.90 and Rayo Plus Dax -$400.51

***Long Term***

The strong up trends in the soft commodity sector continued last week, led by the sharp rally in all varieties of wheat which again neared or posted all-time highs. The spring wheat traded at the Minneapolis Grain Exchanged capped the week ending with its eighth consecutive limit up close due to dangerously tight near-term supplies. The strong price action plus a constructive USDA supply/demand report lead to strength in other grains last week, although corn and soybean market action looks as though it might been in exhaustion state after Fridays lower settlements. The sugar market posted a nice rally last week on ideas that the Southern Hemisphere will more cane to the ethanol industry rather that refining it for sugar. Aberration is long Bean oil with a gain of $8828.00 (open trade), long Corn making $5025.00 (open trade) and long Sugar making $2665.60 (open trade). Relativity is long TGE Corn making 47,000JY (open trade).

Rate futures saw steady to lower action last week as the market found some pressure due to a poor 30-year auction which resulted in higher yields that expected. Long term trend followers remain in a mostly positive state with Aberration long TY with a gain of $8346.88 (open trade), and Long the Euro-bund with a gain of 190.00EC (open trade). Relativity is long the Eurodollar with a gain of $2475.00 (open trade).

The Metals continued on their upward trek during the past week as strong user demand and inflation buying continued to support the sector. The industrial metals continue to lead the way on ideas that the boom in Asian economies will continue for the foreseeable future. Both Aberration and Relativity are long mini-Silver making $903.00 (open trade) and $1328.00 (open trade). Relativity is also long the Tocom Platinum with open trade gains of 209,000JY.

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.