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CTA Spotlight: DMH Futures Management

September 22, 2008

 

Despite some evidence to the contrary last week – life does go on; even in the face of 1000 point swings in the Dow, Gold rallying $85 in a single day, and huge firms like Lehman and Merrill Lynch ceasing to exist.  Please view our newsletter last week sharing some of our thoughts on these volatile times. http://www.attaincapital.com/newsletters/296

And while hedge funds, option traders, and even those invested in some mutual funds which do short selling (Rydex ultra short funds) are adjusting to life without short selling, the beat continues on in the futures industry – where there are no prohibitions on going short stock index futures. Perhaps we will see more people entering the futures markets in order to hedge positions and place short trades over the coming weeks.  

The beat at Attain Capital has continued on as well, with us continuing to research managers and programs we believe in. The latest such manager we’ve had on our radar for the past year or so is the subject of this week’s CTA Spotlight.  A discretionary trader utilizing technical analysis to generate trading levels and ideal. We had been watching the performance of this manager for the past year or so, and liked what we saw. Then, the final piece of our due diligence was completed a few weeks ago as Attain’s President, Walter Gallwas – met face to face with the staff of DMH Futures Management, the latest manager to be listed on Attain’s recommended list.

About the Advisor -

The advisor of the DMH program is none other than David M. Heinz (we can see where he came up with the name). David is one of our own, so to speak, a local Chicago guy who earned his stripes on the trading floors of the Chicago Board of Trade and Chicago Mercantile Exchange before moving on to managing money via a CTA.  

Mr. Heinz graduated from Marquette University in Milwaukee in 1977 with a BA in political science, but didn’t become a politico upon graduating. Instead, he landed at a printing firm in Chicago, moving up to Executive VP. The printing firm served the legal and financial industry, with one of their main products being the trading cards and order tickets used on the trading floors of Chicago’s famed futures pits.

Before long, David moved from selling the trading tickets, to using them himself as a floor trader at the Chicago Board of trade in 1984, just as financial futures markets were starting to gain steam.  He eventually left the trading floor in 1994 as the writing on the wall looked plain to Mr. Heinz that the markets were going to the “screen”,  as floor traders call electronic trading. He went back to the floor for several stints over the years as he maintained his membership, but eventually settled in to his role as a Commodity Trading Advisor.

Heinz lives in the suburbs of Chicago, and is married with four children. When he isn’t working on new trading methods and managing the account, he loves Chicago baseball and is looking forward to the possibility of an all Chicago World Series this fall.

Rounding out the DMH operation are Ted Ryan and Jeff Simon, who handle operations and marketing while David is in charge of the trading decisions. Mr. Ryan and Mr. Simon have been in the futures industry for over 20 years each.

How it Works -

The stated goal of DMH Futures Management is to offer “a low-risk, low volatility program which provides consistent, above-average returns to clients.” That is surely the goal of all programs, but most programs rely on a certain type of market environment to achieve those goals (such as low volatility for option sellers), whereas DMH isn’t tied to any one type of market environment due its discretionary make up.

You see,  unlike most of Attain's recommended CTAs which have a systematic slant, DMH relies 100% on head trader David Heinz’s decisions - making them what is called a discretionary trading approach rather than systematic. Discretionary meaning, trades are made at their discretion, not per a pre-made plan. But having said that, Mr. Heinz does employ several different technical models and systems to generate his entry and exit points.

“Time and Experience are great teachers,” says David Heinz, and those two facets honed as a member of the Chicago Board of Trade and Chicago Mercantile Exchange provide the backbone for the DMH program’s trading methodology.  And Heinz has now spent half his career off the floor, having taken with him a lifetime of lessons learned in the mother of all testing environments, the live trading pits.  This combination of floor trading lessons and a successful off-floor trading methodology are what DMH believes makes them unique.

Says head trader Heinz, “Early on in my career in the trading pits, I tried to determine what all the best traders had in common and quickly learned it was their ability to maintain their discipline at all times.” This type of discipline includes not only cutting losses, but the ability to adapt to different market conditions. For instance, to be able to reduce position sizing when there is exceptional volatility or a once in a lifetime event like the activity we saw last week. Or at times, the discipline can be to simply back off when a market appears to be going sideways.

This discipline has been incorporated into the DMH trading methodology, and is continuously put to the test.  “Discretion allows us to adapt to all kinds of market conditions, where we can be either aggressive or conservative when we need to be.” 

Heinz does interpret the markets using a variety of technical analysis tools in combination with this strict discipline he developed in the “pits.” 

Several technical indicators such as momentum, commodity channel index, pattern recognition, Elliot Wave and moving averages to help Heinz asses the markets. From time to time, Heinz may also consider fundamental analysis including underlying economic and political factors. Such fundamental analysis and discretionary ability to override signals can be a huge benefit during volatile times like last week.

Even when the technical indicators and Heinz’s personal feelings line up, potential trades still must pass strict risk analysis before a trade is entered.  Entry Orders are then placed together with protective stop orders. Trades may be made within the prevailing trend or when there is an indication of a reversal which offers a low-risk, high return opportunity, a counter trend trade will be initiated. Positions generally last from several hours to several weeks, and trades are considered across all liquid domestic U.S. futures markets.

Attain Comments -

A discretionary trader is a unique type of CTA, with its own set of benefits and risks associated with the strategy; and DMH falls directly into that categorization of a discretionary manager.

The pros to a discretionary approach mirror the cons to a systematic approach – and center on flexibility. The flaw of a systematic approach is that it will do the same thing given the same inputs each and every time, no matter what is going on outside of the price. A discretionary approach such as DMH’s can take something like a surprise Fed bailout into consideration before pulling the trigger. This flexibility can often save a discretionary trader from whipsaw moves (getting in at tops, and out at bottoms), as they will choose to wait until the dust settles and then decide on their trade. And as proof positive, DMH has managed to survice the wild swing this past week with a gain of about 1.5% heading into today for September.

On the con side, the main detriment to a discretionary trader such as DMH is that all of the trading decisions rest on a single person’s shoulders. This means that DMH relies not just on Mr. Heinz’ skill in looking at the markets, but also on his availability. This is in stark contrast to a systematic approach, in which once the models are developed – the approach can be followed by computers without the need for the creator to be ever present.  If the strategy depends on the availability of a single person, several questions arise. What if they get hit by a bus, want to go on vacation, quit, etc.? This lack of structure and reliance on a single mind, or in some cases a few minds, causes most institutional investors to stay away from discretionary managers.

At the end of the day, if an investor understands the unique risks associated with a discretionary approach (and it isn’t just discretionary which have unique risks, every strategy type has risks), they could do a lot worse than the DMH program. With close to three years of trading under their belt, they have remained consistent throughout a very volatile past year and a half, surviving volatility spikes; huge trend reversals in commodities, and more. Their low margin usage is also a plus, allowing more aggressive investors to add DMH without much in the way of additional capital if they so choose through notional funding.  

Finally, we specifically like DMH’s low volatility when compared with other discretionary managers. We believe that is a direct function of David Heinz’s discipline and low volatility goal, and applaud the results so far. But we also know that the low volatility going forward is not a function of any systematic program, but relies on Mr. Heinz’s ability to keep that discipline even as assets grow, markets swing wildly, and more.

- John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Volatility explodes in wild week | Chart of the Week

***Overview***

What a week! Can you imagine triple digit moves in the Dow every single day last week? How about Gold rallying over $80 in a single day?  Or S&P futures rallying over 150 points (13%) from their low on Thursday morning to pre-open high on Friday? It was truly an unbelievable week with moves like we have never seen before.

Hard assets seemed to attract the most capital especially the precious metals as safe haven buying sparked gains in the Silver +11.69% and Gold +11.69%. The industrial metals didn’t fare quite as well as worries that strong recent demand would fall prey to a possible global recession kept buying to a minimum. Platinum -5.10% led the way down, followed by Palladium -2.51% and Copper -.65%.   

The Energy sector was splintered during the past week as ideas that near term crude demand could accelerate when gulf coast refineries come back on line after hurricane Ike sparked Crude futures to gain +3.33%. Natural Gas +2.20% followed gains as ideas the recent price dip my have been overdone also added support. RBOB Gas -7.16%, and Heating Oil -1.51% were under pressure from crack spread squaring as the pre Ike move higher versus the Crude oil were ratcheted back in line.    

Stock Index futures had a wild ride last week as a sharp early sell off on worries of a financial meltdown of some large investment bankers was rescued late in the week on an announcement that the U.S. government would step in and save the day. The markets seemed to find comfort on the plan that would somewhat mirror that used to help out the S&L debacle a couple of decades ago. For the week the Russell 2000 gained +3.70% with the Dow and the Mid-Cap posting nominal gains. NASDAQ –2.58% and the S&P -1.01% lagged as  uncertainty of how long it would take the U.S. government to enact the a plan seemed to keep theses two index under a bit of hedging pressure heading into the weekend.            

The Grain and Soft sectors were mixed again last week with most ending with a weak tone, especially Soybeans -4.93% and Corn -3.66% as weakness was sparked by ideas a weaker world economy might force current U.S. export targets lower. The idea of lower demand seemed to also hinder other soft market as Coffee -4.49%, Orange Juice -5.97%, Cotton -3.10% and Sugar lost -1.54%. The livestock sector was mixed as Lean Hogs +3.18% were supported by strong end user support and Live Cattle -.69% found light weakness from heavy production that has kept the underlying cash market in a steady stance.        

The U.S. Dollar index -1.95% came under pressure from the financial turmoil in the U.S. investment banking sector as foreign investment seemed to head back to European based currencies. For the week Swiss Franc added +2.58%, Euro was up +2.19% and the British Pound gained.              

 

***CTAs***

Option Selling managers did not enjoy last week in the least as an explosion in volatility caused many to see losses. As stated above, the SP saw a 155 point range in only 25 hours, after falling over 40 points on Monday and again Wednesday. These sorts of moves are exactly what option selling managers (short volatility) are betting against, and highlight the reason we continuously preach portfolio diversification.  The concern of most managers seemed to be protecting against further market declines after the sharp declines early in the week, and it was the sudden intervention by the government on Friday that caught many off guard.

Managers who had been forced to liquidate short puts the day before or were hedging their short positions with calls all of a sudden saw the calls (against a rallying market) under pressure.  As a result mangers like Ace, Crescent Bay, LJM, and Zephyr who typically sell strangles on the stock index options ended up losing on both sides.  Ace investors suffered the worst of it with a current drawdown of approximately -47% as of Friday's close.  Crescent Bay PSI was down -37%, Crescent Bay BVP was down -11%, LJM was down -20%, Zephyr Moderate was down -37%, and Zephyr Aggressive was down -32%.  Of the above, all but LJM have locked in the various losses by offsetting their open trades. 

For other option mangers the week was not nearly as devastating but certainly did not come without volatility.  Here are some September estimates:  Ascendant S1 -12%, Cervino Diversified -1.5%, Cervino 2x -4.5%, Cervino COP -5.75%, Diamond Capital (Flat with no trades), FCI +0.16% (yes they fully recovered last week's drawdown), Rathiel -4.9%, Summa Capital +9.48% (yes positive - congratulations to them), Zenith Index -0.03%, and Zenith Diversified -0.97%.

Agriculture and Livestock managers have survived well through the recent volatility and even had a chance to profit.  NDX Shadrach is has been leading the way for the better part of the month and is ahead approximately 2% though Friday.  NDX Abednego is ahead +1.5%, Chicago Capital is up 1.9%, while Rosetta is down -2.5%. 

Multi-Market trend following managers also had to battle volatile market conditions last week,  as the treacherous market swings were not limited to just the stock market.   Commodity markets like Crude Oil, Silver, Gold and Soybeans all had big down sessions followed by equally big up sessions last week, with commodities oddly trading in lockstep with US equities rising as they rallied on ideas that higher stock prices meant more consumption. The good news is that most managers finished the week with their heads above water, as most of the overall market trends remained the same despite the wild swings.

Thus far in September the top performing multi-market program has been our very own, APA Modified program with gains of nearly 7.00% thus far in September behind short stock index positions and some nice energy trades. Clarke Global Basic has also continued to do well, up +4.74% so far this month as they  continue to do well in both treasuries and the currency markets.

Not far behind is the Attain Portfolio Advisors Strategic Diversification program which is up approximately +4.12% in September, after being up over 8% and hitting new all time highs on Wednesday, Sep. 17th.  Notable positions include short stock index, long treasury, and short meats.  

Other multi-market managers that have done well include Robinson-Langley with approximate returns of +2.70%, Dighton USA +2.00% (est), Clarke Global Magnum +1.65% (est), DMH +1.17% (est), and Hoffman Asset +0.37% (est).

Managers in the red include Long Term Trading Navigator -0.32% (est) and Optimus Capital Management at -13.10% (est).

***Trading Systems***

Despite some wild swings in stocks and bonds last week, trading systems were relatively quiet; believe it or not. Most day trading systems have filters which preclude them from entering into overly volatile market conditions, and those filters were likely in action last week. At week’s end, the rally in stocks and corresponding slide in bonds generally went against the trading systems, and only handful of the swing systems were able to stay above water.

Beginning with the day trading systems, BounceMOC eRL did what it was designed to do and made +$938.18 on a long trade as the market bounced strongly from its lows on Thursday. Rayo Plus Dax had a breakout week, making +3,496.62 € on two trades from early in the week. On the losing side, BounceMOC eMD had a losing trade on Friday for -$750 while Waugh eRL was -$860.50 on four trades.

Moving on the swing trading programs, Signum TY reached its profit target on one unit and then reversed short later in the week. Signum EBL reversed short as well after previously reaching its profit objective. Tzar eRL and NQ held their short positions while the ES stayed out of the market. SeasonalST ES reversed from long to short during the week and was holding short heading into the weekend. Ultramini eMD and ES were down -$1,380 and -$205 respectively for the week.

Long term programs were busy exiting several positions as several markets reversed course last week. Many programs have exited short metals positions and are starting to exit long treasury positions.

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.