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CTA Spotlight: APA Modified

July 7, 2008

 

In addition to the System Execution and CTA Placement services you’ve come to know from Attain Capital Management, Attain also owns and operates its own CTA programs – the $1 Million minimum Strategic Diversification Program & $250,000 minimum APA Modified Program, through its wholly owned subsidiary Attain Portfolio Advisors (APA).

This unique structure of wearing two hats, one as a capital management firm researching and doing due diligence on 3rd party CTAs, and two as a CTA trading clients’ accounts per our own models and strategy has helped both sides of Attain flourish.

On the CTA side, we are able to learn what not to do in terms of business structure, trade execution, accounting, risk parameters, and more from our due diligence on and experience with other CTAs who didn’t pass the muster for our brokerage side clients. This has allowed a program such as the APA Modified program to be much more experienced than its $3 Million under management and 18 month track record would lead you to believe.

This week's CTA spotlight is on our own Attain Portfolio Advisors Modified program, now in its 18th month of trading and fresh off new all time highs at the end of June.

Who is the Manager?

The manager and creator of the APA Modified program is none other than the Attain Capital Management (Attain) staff and principals. Launched in 2002, Attain's business has been built upon the belief that an investment portfolio with exposure to alternative investments such as technical based trading systems and managed futures programs can consistently outperform traditional stock, bond, and real estate portfolios.

But not content to merely "say" that a portfolio of alternative investments 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. A philosophy major at Union College, Jeff’s aptitude for mathematics and real world experience trading futures markets combine to create a unique perspective which balances the findings of extensive modeling with how things work in actual trading.

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. He resides in downtown Chicago, IL with his wife. For more, visit www.jeffmalec.com

Dr. 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, risk filters, and testing protocols 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. He is currently a research professor at the University of Tennessee, performing his APA duties in his free time, and resides in Oak Ridge, TN with his wife and two children. For more, visit: http://isse.utk.edu/staff/parker.html

How Does the Program Work?

The APA Modified program is based on the same strategy as Attain’s main Strategic Diversification Program, trading multiple markets across multiple strategy types in multiple time frames; but does so with a minimum investment of just $250,000 versus the main programs minimum of $1 Million.

The Modified program was developed in response to one of the main program’s client’s desire to trade as much as possible of our main program, while keeping 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 Program 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 “mini” markets where available, thereby reducing margin. It also removed several high margin contracts like Heating Oil and Unleaded Gas from the portfolio.

A key differentiator between the APA Modified program and its bigger brother (APA Strategic Diversification), which makes it roughly 3 times more volatile, is its use of a logic which does a minimum of 1 contract on many trades.

The main program risks less than 1% of equity on each trade, and the same sizing formula is used on the Modified program. However, given the much smaller equity ($250K vs $1 MM) the formula would often result in a small fraction of a contract (something like 0.15 contracts) for the Modified Program. Because of this, a slightly different formula is used for the Modified program in which it does a minimum of 1 contract on any trades in which the main program formula results in less than 1 contract.

When the risk is such that the main program is doing just a single contract on a trade, and the minimum of 1 logic kicks in for the Modified Program, the Modified Program becomes a 4x version of the main program, achieving the same dollar based profits and losses with 4 times less capital, meaning 4 times the percentage gains/losses.

However, the Modified Program is not just a 4x version of the main program due to several risk filters being applied. For one, the minimum of 1 contract logic is only applied to a point. The value of taking one contract declines as the risk increases (its simply not worth it to risk too large a percentage on any one trade – there will always be more trades), and as such the Modified Program caps the risk it is willing to take on any on trade, doing a minimum of 1 contracts unless the risk is greater than a certain percentage of capital. You would not see, for example, the Modified program risk $50,000 on a Natural Gas trade or the like just for the sake of doing a single contract.

The result of this minimum of 1 contract logic is that the Modified program will 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 (resulting in volatility roughly 3 times the main program).

The underlying strategy:

The underlying strategy used is one in which all models are mechanical, computerized, and technical analysis based - and spread across different markets, strategy types, and time frames. The result is a systematic, multidimensional diversification approach which is designed to migrate performance across changing market conditions.

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, who usually diversify among markets only. 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.

With this multi-dimensional diversification, a poor environment for trend following models (for example) won’t necessarily sink the portfolio, as counter-trend models and/or models working on shorter time frames can benefit from such an environment. Similar to the saying: “One man’s trash is another man’s treasure”, a poor environment for one set of models is usually a good market set up for another set of models. The trick is limiting losses for the models in poor environments while letting profits run for the models in good environments.

Program Comments

This section usually contains the “Attain Comments” on whichever CTA we are highlighting, but we wanted to get views from outside of Attain for a unique perspective on the program, and asked several current clients of the program to share their comments:

“What impresses me about the Modified program is that it's based on a successful and larger program with a four-year track record. The actual 17-month record of Modified is probably too good to be representative of the future, but I expect very good performance with reasonable, although larger, drawdowns.” – Don L.

“I’ve studied several comparable programs : Clarke, APA [main program] ...

For now i’ve invested only in [APA Modified] because it seems to have the better ratio ROR/Risk. By risk I take into account not only Sharpe, Sterling ... but M/E [margin to equity ratio] and RT/million too. It is also good to know it is spread rather precisely between several ST [short term], MT [medium term] and LT [long term] strategies.

…it is rather young and his extra performance mirrors the APA [main program] one (with more leverage) since the volatility has returned to the markets. It’l probably be necessary to make a new decision when the markets will change.” - Daniel R.

Attain Comments

With the disclaimer that any comments made herein are not unbiased – as Attain does own APA Modified, some brief comments from Attain’s research.

1. We do believe a larger drawdown will occur in the future for APA Modified, on the magnitude of 20% to 30%. The maximum intraday DD has been 15%.

2. . While APA Modified has just an 18 month track record, the main program it is based off has track record back to April 2004. (50+ months), allowing a deeper view into the basic strategy.

3. APA has a leg up on many similarly sized CTAs, as its ability to use Attain Capital’s fully staffed trading desk streamlines operations and frees research and strategy personnel from day to day tasks. Also, revenue and capital sharing between APA and Attain Capital eliminates the often dangerous “need” to make money while allowing for higher spending on people and technology.

- John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Same old story: new record highs in energy, stocks lower | Chart of the Week

***Overview***

US Stocks seem to be on the brink of collapse due to shaky economy, coming close to new multi-year lows last week. With billions more in mortgage related write downs coming down the pipeline it only seems like a matter of time before stocks decide to go ahead and take a dive.  As reported in Sunday’s Swiss Newspaper SonntagsZeitung a study done by Bridgewater Associates estimates that the total write downs will exceed 1,600 Billion dollars worldwide….that’s a lot of cash that disappeared into thin air folks.   

In futures trading, stock index futures dropped sharply last week with SP futures losing -1.18% and NASDAQ futures falling -2.34%.   In smallcap trading Russell 2000 futures fell -4.99% and SP Midcap 400 futures lost -4.29%.  

Treasuries remain very choppy due to the uncertain labor market conditions and the uncertainty of whether the Fed will begin to raise interest rates in hopes of boosting the Dollar.  Dollar Index futures were up +0.44% after another weak jobs report last week while Euro Currency futures fell -0.46%.

Energy prices continue to make the biggest headlines however.   Last week Crude Oil futures hit another record high before finishing the week up +3.62% at over $145 per barrel.   Heating Oil futures were also up big at +4.40%, Natural Gas futures gained +2.87%, and RBOB Gasoline futures rose +1.53%.    

Elsewhere, precious metals remain choppy with Gold finishing the week near breakeven, while Silver (+3.73%), Palladium (+1.75%), and Platinum (+1.55%) all traded higher.  In the grains, Soybeans were rocking at +4.58% while Wheat (-2.68%) and Corn (-1.27%) moved lower.   Softs were also volatile with Sugar ahead +9.18% and Cotton losing -7.43%.  Finally, in the meats, Live Cattle fell -1.24% and Lean Hogs lost -2.41%.

***CTAs***

With 2 weeks to go until the next index option expiration and the VIX bouncing up over 7% since the end of June, several short index option traders posted a negative week of trading to start the month.  Ascendant Asset Advisors S1 strategy felt the most pressure as the strategy can increase positions in an attempt to capitalize on short term volatility spikes.  The strategy was down approximately 3% last week after recovering nearly 30% from their January low.  Crescent Bay also had a volatile start to the month as both programs (BVP and PSI) were down approximately 2.5% last week.  Ace was down -1.84%.  Zenith, Zephyr, LJM, Raithiel, and Diamond were all relatively flat for the week. 

In other option trading, Cervino Diversified has been a star performer this year - as of late their holding long a September put spread over the past 2 months has benefited the bottom line.  For the month the 1x strategy is ahead 0.33% and the 2x strategy 0.68%.  For the year Diversified Options 1x is ahead +7.10% and Diversified Options 2x is ahead +15.02%.  In addition to the above, the non index options strategies are also ahead this month: Cervino Commodity Options is up +1.19% and FCI is ahead +0.42%.

With agriculture and grain markets running rampant lately, we have been keeping a close eye on the agriculture traders for both added volatility and investing opportunities.  Last month in this section we noted that Rosetta Capital was between a 15% and 20% drawdown from their March/April equity high...and as of last Thursday they have recovered approximately 4-5% of the drawdown. We'll be looking for them to make it on to new equity highs in the months ahead.  Last week Rosetta was ahead +1.42%.  In other trading, NDX Abednego was ahead +0.61% for the week after earning 8% in June, NDX Shadrach was down -0.36% after earning +25% in June, and Chicago Capital lost -0.03%.

With only a few trading days in the books it is very hard to get a read on where the multi-market CTA’s are headed for July…but we’ll try anyway.   Out of the gate the Long Term Trading Navigator program is leading the way up +4.69% on the strength of its long energy positions.  Next in line are the Attain Portfolio Advisors Modified Program at +2.39% and full size program at +1.00% for the month.  Finally Robinson Langley has posted strong early returns at +1.31%

Most multi-market advisors including Dighton USA, Hoffman Asset and Northside trading are at breakeven for the month.     However there are a few in the red including Optimus Capital at -2.56% and Clarke Capital Global Magnum at -1.06%.

Finally, a CTA new to Attain in the past few weeks, and our first 100% stock index swing trading program, Pere Capital, is up +3.16% in the first few days of July.  

***Trading Systems***

Trading system activity was limited during the shortened week, but a few systems were able to make the most of 3 ½ days of trading.

Compass SP came in at the top of all trading systems by tacking on + $3,053 on two trades for the week. AG Xtreme2 SP had three trades for +$1,000. Additionally, Waugh eRL had two short trades for + $398. On the losing side, Rayo Plus Dax had two trades that lost -$3,319.78.

In swing trading, Tzar eRL was stopped out of its long position for a loss of -$3,582.83 while the NQ and ES held their short positions. Signum EBL and TY both held onto their long positions and enjoyed a boost in open trade equity after several weeks of choppy trading. Mesa Notes is on the other side of the treasury market holding short, and about ¾ of the way towards hitting its stop loss. Elsewhere, Ultramini ES lost -$530 on a long trade from Thursday.

In long term trading, global equities are breaking several key levels to the downside so expect short entries over the next few weeks barring any significant rebound. Bonds are also starting to rally to levels that could trigger exit points on short positions and start to induce new long entries.

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.