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CTA Spotlight NDX Capital Management
July 21, 2008
Last week, in the July 14th issue of the Attain Alternatives Newsletter, we released our semi annual Top 15 CTA & Trading System Rankings. Managers were ranked on a variety of ratios including YTD Return, Total Return, Compound RoR, Lowest Max DD, Sharpe Ratio, etc. (The complete rankings can be found on our website.) One manager who stood out from the rest was NDX Capital Management with three separate programs ranked in our final Top 15, a quite impressive feat.
Today we will dig a little deeper into NDX and each of the three programs offered by the manager.
Who is the Manager?
Located in the heart of the Twin Cities, in Minneapolis, MN is NDX Capital Management. The company was started in 2005 by Mr. Phillip Herbert, an experienced stock broker turned money manager, who launched NDX in anticipation of a potential boom in commodity investments. Later, in 2005, Mr. Alan Zenk joined the company to manage the day-to-day operations of the firm.
Mr. Herbert is the Chief Executive Officer of NDX Capital Management and has experience managing money in both the stock and futures markets. Phillip began his career as a stockbroker with Paine Webber Group, where he was a top performing broker on multiple occasions. In 1991, he left for a similar role at Pru-Bache Securities before opening the Minneapolis Branch of All-Tech Investments, Inc. While managing money and trading stocks, Phil correctly saw that electronic trading was the way of the future and he left the brokerage industry to form NDX in 2005. Mr. Herbert makes his home in New Brighton, MN with is wife and four children. He is an avid hockey fan and coaches his childrens' teams during his free time. Sometimes, he can even be found playing hockey on the weekends with his children on the lake near his home. Other hobbies include cooking, fishing and bird hunting.
Mr. Zenk is the Vice President of Operations of NDX Capital Management and is responsible for all daily operations. Alan’s attention to detail and customer service, along with his strong analytical skills make him ideal for this hands-on role in the company. Alan first began working with Phillip in 1988 at All-Tech Investments as a stock day trader. While his trading career got off to a slow start (he lost $1280.00 on his first trade) Alan was hooked on the markets and trading. He got his start in alternative investments with ArrowHead Capital Management which specialized in non-correlated, low volatility investment strategies, before re-joining Phil at NDX in 2005. Mr. Zenk is also married and has two boys, ages 8 and 6. Mr. Zenk’s high energy personality continues after the work day as well and he can often be found bungee jumping, ballooning, and power parachuting. He did decide to give up skydiving, however, after a near death experience in college.
How does the program work?
NDX offers three programs to their investors - Abednego, Shadrach and Methuselah. One big difference between NDX and other managed futures mangers is that they have purchased their programs from third party traders. However please don’t get NDX confused with the individual trading systems that Attain offers. The programs that Phil & Alan have purchased have been traded for years by experienced traders and were chosen for their uniqueness in the marketplace.
When analyzing the NDX offerings, we like to group Abednego and Shadrach together because they both focus on hog spreads with the only major difference being risk per trade. These programs were purchased from Simpson Trading LLC, a floor brokerage operation in 2006. Both Stanley and Albert Simpson continue to play an active role in the trading execution.
Abednego and Shadrach programs are focused on hog spreads, trading fundamental and technical signals based on known seasonal patterns that have existed for decades. The hog market is different than other commodity markets when considering that the animal’s life cycle is planned around the higher demand that typically occurs during holidays such as Christmas, Easter and the summer barbecue season. This allows for more predictable season patterns to emerge. Both programs also take advantage of technical inefficiencies that present themselves from time to time as trading opportunities, brought on by such things as spikes in grain prices or transportation cost increases.
Abednego is much more conservative than Shadrach. We like to describe Shadrach as being only appropriate for the “swing for the fences” portion of an investor’s portfolio, where one is happy to exchange the possibility of a large drawdown for outsized returns. Shadrach has a compound RoR of 49.62% with a Max DD of approximately -22% per $100,000 invested. In comparison, the Abednego program has a compound annual RoR of 15.68% with a Max DD of approximately -11% per $100k invested.
Trade Example: (Abednego)
A spread trade is the simultaneous long and short entry in a commodity across different delivery months. For example one recent trade in the Abednego program from May was as follows:
Long 1 Feb ’09 CME Hogs - 79.82
Long 1 Feb ’09 CME Hogs - 79.17
Short 1 July ’09 CME Hogs - 77.50
Short 1 July ’09 CME Hogs - 76.25
The Methusela program is a short term trend following program that trades e-mini stock index contracts (Dow, S&P, Russell, Nasdaq) and US 30 Year Bond futures. This program is a more traditional program in that it is an automated trading system that trades short term trends and is not focused on spreads like the previous programs. The manager does have a discretionary override component that is used to make the program more conservative. Examples of overrides could be not taking signals just before a Fed meeting or option expiration day, only taking 1 or 2 signals when 4 come up all in the same direction, etc. Methusela is still a newer offering from NDX, after just completing its first full year of trading. Because of this it is still not on the Attain recommended program list at this time and we will not be covering it any further today.
June Composite Performance:
+11.38% for Abednego, $14,156,945 AUM
+31.01% for Shadrach, $34,195,912 AUM
-3.24% for Methuselah, $5,824,356 AUM
Many money mangers and analysts will tell you that the key to be successful in this business is the ability to manage risk. Yes, Return on Investment is also an important component, but return doesn’t matter as much if your funds aren’t available to see it.
Over the last 18 months of following NDX, we have been most impressed by their ability to stay focused, stay true to their trading rules, and most importantly manage risk. Across this time period we have not observed more than 5% margin to equity on the Abednego program and 10% on Shadrach with average closer to 2.5% and 5% respectively. From a volatility stand point, when trading with lower margin levels there is a reduced chance of fat tail drawdowns at these levels.
However, in terms of drawdown, despite the low margin use it is important to note that the manager is trading a small concentration of markets and when those markets have extreme volatility spikes there is a chance of higher drawdowns. As for intra-month drawdown levels investors should note that last August Abednego reached as low as -10% level and Shadrach touched down as low as -20%.
One of the criticisms that we heard from many clients about NDX was the frustrating period of low trading activity during the first six months of 2007. Some clients even contemplated switching into more active products. The reason for the slowdown was that the spreads in the Hog market had expanded beyond normal levels and the manager simply refused to trade during this more risky time period. This is a good sign in our opinion and is a testament to the manager’s focus.
Beyond risk per trade, perhaps the biggest thing we like about NDX is their willingness to communicate effectively and quickly with customers. Mr. Zenk’s responsiveness to questions and detail is really superb. Unlike some managers who slow down on communication after you open your account, the NDX team makes sure that the investor is always well informed and is an open book for customer questions.
NDX Quick Facts:
Min Investment: $100k
Allow Notional Funds? – Yes
Fees: 2% Mgt / 20% Incentive
Max DD: -22% Shadrach / -11% Abedengo
M/E: 50% Shadrach / 25% Abedengo
IMPORTANT RISK DISCLOSURE
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The news of better than expected earnings for the banking sector sparked a recovery in U.S. stock futures during the past week, although weaker earnings from the tech sector and continued worries of a global economic slowdown did take some of the steam out of the rally. For the week Dow futures gained +3.63% with S&P futures tailing along up +1.74%. The Tech sector was softened by poor earnings results as NASDAQ futures ended slightly higher. The excitement filtered into the small-cap area with the Russell gaining +2.58% and the Mid-cap ending the week up +1.68%.
Worries of a deeper world economic slowdown seemed to rule in most commodity sectors and it was especially evident in the industrial metals with Platinum losing -9.48%, Palladium down -8.99% and Copper falling -1.90%. Silver seemed to follow the lead of industrial metals shedding -3.93%, although Gold seemed to ignore all the fuss ending just slightly lower.
Energy futures did not avoid consumption worries tied to the world economic slowdown either as Crude Oil posted the largest one week drop ever recorded. For the week Crude Oil prices fell -11.22%, Natural Gas ended down -11.39%, RBOB Gas shed -11.18% and Heating Oil lost -9.57%.
The grain and food sectors continued to fall last week as ideas of larger U.S. crops based on a more favorable weather scenario coupled with poor world economic conditions that could curb demand sparked another round of heavy selling. In grains Corn led the way down -11.49%, followed by Soybeans -9.38% and Wheat -3.32%. Losses in the food sector were just as severe with Sugar down -8.56%, Cocoa -4.12% and Coffee -3.23%. The livestock sector again posted mixed results as Lean Hogs gained +2.93% and Live Cattle lost- 3.76% mostly from news that export demand should remain strong for pork which has taken market share from the beef sector.
So much for quiet summer markets - with the 1st half of July in the books we are finding a larger than normal divergence of returns within each CTA sub category.
In the options category, returns for July to date are ranging from +2.87% to -5%. On the high side LJM successfully navigated the recent volatility and is currently the top performing option manager with returns of +2.87% MTD.
On the low side, Crescent Bay BVP is currently down -5% for July. We spoke to their manger, David Bedford, on Friday and he had the following notes to investors: The goal of the BVP strategy is to be net long volatility; however having slightly underperformed over the past few months the manger has implemented a slight modification to the long option position that is now fully in place and one that he is hopeful will add to the strategy's long volatility performance tendencies.
Other options manager MTD estimates are as follows: ACE Investments SIPC -0.48%, Ascendant S1 -3.29 (+11% last week), Cervino Diversified Options +0.82%, Cervino Diversified 2x +1.91%, Cervino COP +0.80%, Crescent Bay +PSI -1.42, Diamond Capital +0.20%, FCI -0.03%, Rathiel -1.1%, Zenith Index +1.14%, Zenith Diversified +1.03%, Zephyr Aggressive +1.21%, Zephyr +Moderate 0.74%.
In the agriculture and grain markets estimated returns for July are ranging from +1.32% to -2.83%. Rosetta is leading the category as the manger continues to work his way on toward new equity highs. On the low side, NDX Shadrach is down approximately -2.83% after posting gains of +25% in June.
Other returns include Chicago Capital +0.08% and NDX Abednego -1.49%.
The largest range of returns for the month has been in the multi-market and trend following space with estimated returns ranging from +3.88% to -10.16%.
On the high side, Northside is ahead an estimated +3.88% from gains in their Gold and Canadian Dollar positions. On the low end, Longterm Trading is having a tough time fighting through the intermediate-term volatility of the energy and grain markets; and as a result is down an estimated 10% for the month to date.
Other multi-market and trend following MTD estimates are as follows: Attain Strategic Diversification -0.67%, Attain Modified -5.78%, Clarke Global Basic -0.12%, Clarke Global Magnum +0.63%, Dighton 0% (no trades), Hoffman Asset -4.24%, Optimus -4.51% and Robinson Langley -2.73%.
It was a quiet week for trading systems as a lot of the movement took place in overnight trading leaving little to work with during the day sessions. The rebound in equities did benefit systems like Bounce that are designed to catch the "dead cat bounce" that often occurs after periods of heavy selling activity.
Beginning with the day trading systems, Kappa Dax traded every day of the week tallying +$881.31. As previously mentioned, BounceMOC eRL was able to join in the rally on Wednesday for +$561.76. BetaCon 4/1 ESX had one long trade from Thursday for +$351.69. Compass SP had two trades for +$250 while Waugh eRL traded five times for +$222. Rayo Plus was the only day trading system to finish in the red with a loss of -$4,066.75 for the week.
Moving on to the swing trading programs, Bounce eRL was just ahead of its day trading counterpart (BounceMOC eRL) up +$590 for the week. Another system that was active last week was Ultramini ES with losses of -$1,640 on three trades. Jaws US 60, 400 and 450 were all stopped out of long positions for losses of -$709.37, -$734.77 and -$800 respectively. Mesa Notes entered long early in the week and was holding its position heading into the weekend. SeasonalST ES entered short mid-week and was under water heading into the weekend as stocks finished the week significantly higher.
With the exception of the aforementioned systems, the rest of the swing programs held their respective positions. Tzar continues to hold short in the ES, NQ and eRL. Signum EBL and TY both continue to hold long with their usual two units (signals enter in two units and look to exit at two different profit levels).
In long-term trading (trend following), several programs entered long in Gold and Silver just before the drop in inflationary commodities. Look for exits this week if those markets do not see a continuation in the upward trend.
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.