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CTA Spotlight - Claughton Capital
December 8, 2008
It has been a great year to be a “long volatility” manager, with huge moves to the upside through the first six months of the year followed by staggering moves to the downside in the second half of the year. And if you had to pick a strategy type which would do well moving forward, you would likely come up with something which risks a small amount in hopes of catching one of these big moves and returning gains many times the amount risked on the trade. But you would also want some protection in case markets remain locked in sideways price action for the next several months while people figure out whether it really is the end of the world (financially speaking) or not.
A program which was built to address both these issues – profiting from large trend moves in either direction, and protecting the portfolio from range-bound sideways price action is the subject of our CTA Spotlight. Claughton Capital attempts to meet these objectives by participating in trends AND trading the range bound markets.
Who is the Manager?
Claughton Capital is operated by Chief Investment Officer, Keith Ganzer and President, Eric Schreiber, whom together have over thirty-five years experience in the futures industry.
Keith began his career with first at Commodities Corporation USA, now part of Goldman Sachs, and then Moore Capital Management where he served as the Head of Systematic Trading and Research. He left Moore to form and operate his own trading operation, Brookville Investments, which traded client funds successfully from August 1993 until July 2000.
Mr. Ganzer has the scientific background found in many “quants”, with a Chemical Engineering degree from Princeton University and B.S. in Chemistry from Case Western Reserve University. On the financial side, he is a Chartered Financial Analyst, member of the CFA Institute and a PRMIA Certified Risk Manager.
When not working on Claughton’s trading models, Keith spends time with his wife and daughter, and enjoys working on his home - a historic converted boarding house in Harlem, NY that he discovered even before President Clinton moved into the neighborhood.
Eric Schreiber’s introduction to trading is a much different (and unique) story. Some floor traders in London liked what they saw out of him on the basketball court at the gym, and persuaded him to become a floor trader by investing their time and money in teaching him the business. After learning all he could, Eric became a floor trader in the German government bond (Bund) pit at the London International Financial Futures Exchange; then was a partner of Chicago International Arbitrage in London, a bond futures arbitrage firm that became the world's largest volume trader of Bund futures on the L.I.F.F.E. and EUREX exchanges.
Mr. Schreiber’s educational background includes and MBA degree from the University of Chicago and B.S. degree in Mathematics and Computer Science from Emory University. He is married to his “college sweetheart”, whom he has a son with.
The team at Claughton is rounded out by three other employees at both their New York and Miami offices who help with technology, operations, and client service.
How does the program work?
Claughton Capital belongs to the ‘systematic, multi-market’ managed futures strategy style we highlighted a few weeks ago in our Nov. 10th e-newsletter. This strategy style includes the old school trend following CTAs which the managed futures industry was really built on, and on the surface level Claughton Capital could be though of as a trend follower in that they will attempts to enter into and benefit from extended price trends.
But after that, the comparison to trend followers falls apart, and it become evident Claughton is nothing like most trend followers. That is because Claughton differentiates itself by not only employing a positive Gamma strategy (long volatility), but also tactically trading the markets it follows “inside of the range. The goal of trading “inside of the range” is to avoid the cost of the market having to go all the way from the top of the range to the bottom of the range in order to reverse a position (what Claughton calls the cost of the range). It is this trading inside of the range which Claughton believes is its edge.
Claughton uses an innovative systematic approach called Auto-Reactive Positioning (ARP) to trade its diversified portfolio of futures markets “inside of the range”. This ‘ARP’ strategy employs a probability based pattern recognition strategy to generate trades, rather than the old fashioned trend following method of getting in line with the trend once it has “broken out” from a certain price range.
To understand how Claughton is different, it helps to first understand one of the main flaws with traditional positive Gamma (long volatility/breakout) programs. Traditional programs suffer through a lot of false breakouts where prices break out of their current range, only to reverse course and come back to their moving average and stop the position out. Such action causes losses for traditional trend followers, because they enter at the top of the range (for example), and get out in the middle of the range when it comes back to the average. And then wait until the market gets to the bottom of the range to reverse their position. A traditional program needs the average price of the market to shift significantly higher or lower to see profits, so that when prices return to the average , it is higher (if long) than the point they got in at.
Claughton’s ‘ARP’ strategy attempts to bypass this traditional flaw by not waiting for the market to break out to get in line with a trend, and not waiting for the market to traverse the whole length of the range when looking to reverse position; but rather getting in when a pattern which has a high probability of leading to a change of direction develops.
The Auto-Reactive Positioning (ARP) model attempts to identify these patterns by first answering dozens of questions on the current market characteristics. They assign a True or False value to market characteristics/questions such as if the is above its moving average, if it is at all time highs, in a 50% retracement, etc).
The end result will be a True/False string looking something like the following - True/True/True/False/True/False/False…..True/False/True. They then run that string through their model to see what market pattern it lines up with, and from there have a certain “market state” assigned to each pattern. Once they know the market state, they then go to their database of probabilities for that market state and see what the probability that being long the market is the best position to be in, based off the historical performance of being long the market in that market state. If that probability is greater than 50%, the model signals to be long, if it is less than 50%, the program wants to be short that market.
This probability factor is applied to all 18 markets Claughton trades every day, with a position only being exited if the probability switches from over 50% to under 50% or vice versa. When the probability does switch, indicating it has historically been better to be in the opposite position – the program doesn’t just exit, but reverses position. This means that Claughton is always in the market, in one direction or the other; which is another big differentiator from normal trend followers who may only enter a specific market a handful of times during the course of the year.
This method of switching between long and short before the market has broken out of a consolidation phase means that Claughton has the ability to do well during the sideways market action traditional multi-market systematic programs suffer in. They can profit (or lose) from short lived moves up to the top of the range or down to the bottom of the range, whereas that price action is basically ignored by traditional programs which don’t even look at a market until it has broken out of the range.
The trick is risking a small enough amount per trade so that the small losses back and forth due to always being in the market don’t become too large. What they call tactical trading “inside of the range” is designed to limit losses (or even provide small gains) while the market is range bound; allowing the model to constantly be in a position in each market to insure investors catch the next trend. They are not concerned if the market goes against them “inside of the range” per se, as they will reverse their position and take just a small loss; but at the same time keep the powder dry, so to speak, by positioning themselves for a breakout trade which will provide larger gains.
Rounding out the strategy are a set of disciplined trade execution and risk management techniques which aim to risk less than 1% of equity on each trade. (although they will take at least a single contract at times even if the risk eclipses their <1% target). The minimum investment is $1,000,000 nominal, which can be traded with around $400,000 cash, $600,000 nominal funding.
There has been a lot of interest in systematic, multi-market managers over the last few months, as those models have been the lone survivors as the stock market and nearly everything else has blown up to varying degrees; and the Claughton program is one which really stands out for the unique way in which it approaches the market.
You surely won’t find many multi-market programs which are always in the market in each of the markets in their portfolio these days, and that is normally a recipe for disaster should the market oscillate back and forth in range bound price action. But reversal/’always in’ systems usually get into trouble because they are buying the tops and selling the bottoms. Claughton’s answer to that is an attempt at buying before the tops and selling before the bottoms. Whether they can correctly do that will be the secret to their future success, but early indications based on non-correlated performance in some bad months for systematic, multi-market models (including trend followers) is encouraging.
The always in feature also insures that they will catch trends earlier than their counterparts, while they do let the trends run, essentially exiting trades in the same manner as normal trend followers. This mimicking of trend followers during the trends, and different operation during non-trending periods has left Claughton in the enviable spot we outlined in our newsletter last week of being correlated with the good times for managed futures indices, and non correlated during the bad times.
Playing devil’s advocate for a minute to try and find some negatives – their fixed portfolio of 18 markets would be one concern. With 3-5 times that number of tradable markets, what if other markets are performing better with the model? Would it not be better to take trades on those markets with the highest probability of success rather than always taking the same market’s signals even if a much lower probability of success? The ‘always in’ feature is also cause for some concern, as a perfect storm of whipsaw market action which quickly oscillates back and forth could cause them issues. It also takes some of the luster off their ability to get into trends earlier than others, as being always in the market insures you are in every trend (whether it be a real or a fake breakout).
But in the end, there is something more than simply always being in the market going on here. We like that they are doing something different, but also like that their performance record appears to show they do have skill in the “tactical trading inside of the range” they espouse. And we think they are a nice source of diversification for anyone with exposure to more traditional programs which are at risk of flat to down performance in sideways markets – like Clarke Capital, Chesapeake, Hoffman Asset, and others.
All in all, we like what we’ve seen out of Claughton Capital, like where they are headed as a manager, and have added them to our recommended CTA list.
- John Cummings
IMPORTANT RISK DISCLOSURE
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Feature | Week In Review: More of same in first week of December, stocks and commodities down, bonds up | Chart of the Week
The marketplace continued to be hampered by recessionary fears last week, as lower prices were again the norm, helped in part by Friday’s monthly jobs report with figures showing the largest monthly loss of jobs since 1974. Most sectors continued to be unable to overcome ideas of much lower demand based off of global recessionary pressures, and this activity was again in the forefront of the Energy sector. The evidence remained a major factor in the Energy sector which again led most commodities down. For the week RBOB Gas shed -25.50%, Crude Oil fell -25.30%, Heating Oil lost -17.19% and Natural ended -11.80% lower.
Activity in the Metals sector also fell victim to global recessionary pressures especially in the industrials as they were hampered by ideas that forecast for strong growth especially emerging markets with be cut sharply for the time being. The industrial metals were led down by Copper down -16.84% followed by Palladium which lost -16.35%. The precious metals also lost ground as Platinum fell -10.88%, Gold lost -8.26% and Silver ended -7.93% lower.
The commodity and food sectors were also the target of lower price activity as the consumer staples found pressure from ideas that job loss not only in the U.S., but a strong breaking in the global economy would reduce demand even more than originally anticipated when the financial crisis was in its infancy stage. The grains were led lower by Corn -15.53%, Wheat lost -15.39% and Soybeans fell -11.75%. The soft sector was also lower with Cotton -13.88%, Sugar -11.79%, Coffee -11.22%, Cocoa -6.77% and OJ -1.79%. In the livestock sector Live Cattle ended the week -7.81% and Lean Hogs fell -4.26%.
Stock Index futures continued to be dogged by weak economic forecasts, especially the weak unemployment numbers and this in turn sparked worry of more financial problems for more companies. The losses were pared back late Friday on ideas that the U.S. government would come to the aid of the ailing U.S. auto sector after two days of vigorous days of testimony by the Big 3 automakers. For the week S&P 500 futures lost -2.66%, Dow futures fell -2.47% and the NASDAQ was down -0.78%. The small cap sector fared worse with Mid Cap futures down -4.44% and the Russell futures -3.47% lower.
U.S. Rate futures again experienced strong support as investors continue to flee from the stock market into fixed income investments despite the lower yields. 30-year Bond futures ended up +4.56%, and 10-year Notes futures gained +1.32%. Currency futures were a mixed bag for the week as Yen futures +2.91% and the U.S. Dollar index +0.67%. British Pound fell -4.73% and the Swiss Franc lost -0.72%. The Euro ended the week near unchanged levels.
Systematic, Multi-Market programs started the month on a strong note last week. After two months of profitability in October and November this sector of managers is looking to continue the string of success and finish 2008 on a high note. After one week of trading the results look promising as a bunch of managers are in the black thus far, thanks to the big sell off in stocks, energies, and more on the 1st day of the month. The recent rally in stocks and subsequent sell off in treasuries has taken a little bit of the shine off the December numbers, however; with many mangers holding long treasuries and/or short stock indexes.
Heading into today, the top performer continues to be Clarke Capital Management. Clarke was the top performing manager in this sector in November and continues to lead the pack in December with approximate gains of 9% in the Global Basic Program. The Clarke Capital Global Magnum program has performed well also with approximate returns of +3.08% this month.
Next in line after Clarke, is the Attain Portfolio Advisors Modified Program which is up approximately 5.85% this month. Unfortunately so far the APA Strategic Diversification Program has not followed suit and is down an estimated -0.50% in December. Also in the black is Robinson – Langley Capital who is bouncing back with approximate returns of +2.48% in December after being down slightly last month.
Programs that have started out slower include Hoffman Asset at an estimated -0.47% and DMH at approximately -1.13% so far. Deeper in the red is Dighton USA which is down -16.68% heading into today. However, we estimate that Dighton shaved about 5% of this loss off today based on today’s market activity.
For Option trading CTA's a 28% drop in the Volatility Index from it's all time high on November 20th is a beacon of hope to short volatility mangers. As a result of this decline in volatility, the month is starting out positive across the board. Here are a few estimates: Ace Investment +2.05%, Cervino Diversified 1x +0.33%, Cervino Diversified 2x +2.33%, Crescent Bay PSI +0.06%, Crescent Bay BVP +2.70%, FCI +1.98%, Raithel and Zenith have not traded.
As discussed in our 10/13/2008 newsletter - it will be interesting to view the performance of option managers in the months ahead, if the November highs in VIX prove to be all time highs. As we noted in the past newsletter - "for those who survived this period and proved their mettle in managing risk, investors should recognize that markets over the next few years will likely be "in the zone" for these programs."
In the agriculture and grain markets, continued gyrations in front month market prices vs. back months has traditional methodologies of mangers like Rosetta and NDX lightening up their positions waiting for the next trend. For the month to date, NDX Abednego is down -0.80%, NDX Shardrach -1.1%, and Rosetta -2.0%.
Trading systems were relatively quiet last week as stocks finished the week unchanged after moving sharply lower on Monday and rebounding on Friday with little movement in between. Day trading systems slightly outperformed the swing systems but it was nothing like the performance we have seen in recent weeks.
Beginning with the day trading systems, Compass SP was the top performer, up +$2,350 after reaching its profit objective on a short trade from Monday. Waugh eRL was active with four trades for the week totaling +$850 split evenly between long and short trades. BetaCon 4/1 ESX came in just over break-even +$267 for the week while Rayo Plus ended the week down -$2,252.
Elsewhere, Strategic ES got off to a great start in its debut at Attain. The program entered short mid-week, then reversed long for a gain of +$507.50 on the closed out trade and was making +$1,815 in open trade equity heading into the weekend. AG Mechwarrior ES started the week off on the wrong foot -$814 on a closed out long trade from Monday but re-entered long on Fri with +$915 in open trade profits heading into the weekend. Mesa Notes was stopped out of a losing short trade for -$2,050 and re-entered short later in the week.
In long-term trading, several of the soft markets like Cotton and Coffee broke through new lows in tandem with the energy markets. Look for new entries in those markets if they continue to move lower this week.
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.