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Managed Futures Spotlight: Hoffman Asset Management
March 23, 2009
While it has been a bad couple of weeks for multi-market systematic programs as the stock market has reversed, sending grains, energies, currencies and more into counter-trend rallies – we have had a CTA Spotlight on one such program on the schedule for some time now based on their great 2007 and 2008 performance (past performance is not necessarily indicative of future results).
The fact that this strategy type is struggling a bit lately makes this an even better time to consider the following CTA program, whose manager Attain’s staff has known for close to 10 years.
This month’s CTA spotlight is on multi-market systematic program Hoffman Asset Management.
Who is the Advisor:
The manager of the aptly named Hoffman Asset Management is none other than Dean Hoffman.
Dean has been in the futures business for over 20 years, having started back in 1987. Since that time, he has hung his hat at 16 different NFA member firms – having built up a veritable lifetime of experience as he’s moved from retail broker to brokerage firm owner to trading system developer to commodity trading advisor.
This lengthy experience at different brokerage firms and clearing houses taught Dean one main lesson – that there must be a better way than clients and brokers guessing which way markets are headed. In the early ‘90s, with his office located next to a 2nd generation “turtle trader”, Dean began to see the possible benefits of systematic trading and has focused his efforts in that direction ever since.
Moving into the business of developing systematic trading models was a natural fit for Dean, who says he always had a strong interest in computers and has a formal education background in computer science from his time at Penn State University. Dean applied both his real world experience and technical background in what became a decade long research project into systematic trading of the futures markets.
The result of this research is what Mr. Hoffman is probably best known for up to this point - as the President and founder of Strategic Trading Systems Inc., through which he developed and marketed the popular trend following system Synergy, and then updates/upgrades to that program in follow ups Checkmate, Fusion, Interplay, and Relativity (a close cousin to the model used in the CTA)
Dean firmly believes that all system developers should align their interests with that of their clients, and he personally traded the systems that he offered for sale for many years. This trading of his systems led to more research into how to manage the systems’ exposure on a day to day basis – and out of that desire to better manage the exposure came Hoffman Asset Management.
It was not enough to simply build and sell a system, Dean found out. Systems need upgrades, active money management, and more which can only be done through a traditional Commodity Trading Advisor (CTA) structure. With the new ambition to not just build the models, but actually manage the money on an ongoing basis using the models as well, Dean formed Hoffman Asset Management in 2004 and started managing client accounts.
Dean was a Chicagoan for many years until moving to central Pennsylvania to be close to family around 2000. He reports that he is happily married with 3 “beautiful children”. When pressed for any hobbies or outside activities, he responded: “My free time and hobbies are primarily centered on my kids, as they seem to consume every moment I have outside of work!”
How does the program work:
The Hoffman Asset Management program is a multi-market systematic program similar on the surface to Clarke Capital and other so called trend followers in that their mission is to capture medium to long term trends in the commodity and financial markets.
But the Hoffman program approaches trend following from a different direction than many of the usual suspects in this area. Most multi-market systematic managers run their models on the same group of markets every day, without fail, and take any positions which get signaled. Ignoring sector limits for a minute, this could result in active positions in all of the markets the manager runs his signals on. (and this actually happened to some trend following managers last July, when runs to highs in nearly all commodities led to simultaneous long positions in nearly every commodity market right before a massive sell off)
For Hoffman, instead of applying the program to the full group of many different markets at the same time every day as most multi-market systematic managers do, they first run a model on the portfolio of markets to be considered by the main model. It is like a system on a system.
The Hoffman program runs this “market filter” on approximately 70 markets before running its main program to see whether there are any long or short signals for that day. The result is a dynamic portfolio of only about 15 out of the 70 markets at any given time.
This is the main differentiator between other trend following managers and the trading systems by Dean Hoffman. The portfolio is dynamically determined daily as opposed to being a static choice made upfront. The idea, according to Dean Hoffman, is to have a portfolio that consists of the highest opportunity markets at any given time.
Once a trade is identified it must go through a gauntlet of filters where the ones deemed having the highest probability for success with the lowest risk are selected.
The filters are a combination of both the dynamic portfolio rules as well as the risk control rules. The probability of success is primarily determined by looking at the average winning trade amount times the average percentage of winning trades vs. the average losing trade amount times the average percentage of losing trades.
In addition to the sophisticated logic that goes into generating the dynamic portfolio and trades there is also an equally sophisticated money management overlay on top of all of this. Specifically, the trading algorithms are constantly monitoring and managing four different measures of risk exposure on any given trade.
The first and most obvious level of risk that is evaluated is the individual risk in the trade itself. Generally speaking, the systems attempt not to risk more than 2% of equity per trade (sometimes it’s only 1% or less). This helps minimize the risk of any single trade to the entire portfolio. Furthermore, even if the risk falls within the maximum 2% of equity there are times that he determines the volatility in a given market is too high. During those periods he has found that the risk-to-reward is just not favorable and he reject trades regardless of whether or not he can “afford” it.
The next level of risk that is managed is “sector risk.” What sector risk does is to evaluate the current positions in the portfolio to see if new trades being presented are too highly correlated to current positions. The maximum sector risk the systems like to see is about 3%-5%. What this means is that if you are already long a crude oil position that has a risk of 3% or more of the portfolio then any new trades in heating oil or unleaded gasoline would be rejected. The reason for this is that some of the biggest and most severe losses tend to come from times when a portfolio is overly exposed to a lot of highly correlated items and they all move against the portfolio at once. This risk is greatly mitigated by having stringent sector risk controls in place.
The next consideration is what Hoffman calls “portfolio heat.” Portfolio heat is the amount of money your portfolio would lose if EVERY position were to be stopped out at the same time. Hoffman Asset Management attempts to keep this amount under 10%.
Finally, the Hoffman program manages the changing open trade equity risk. This comes into play during winning periods. For example, assume you started a crude oil trade with $2,000 in risk, however the market has gone sharply in your favor and the stop did not rise as fast as the market did and now the stop is $4,000 away. Hoffman Asset Management looks to monitor and manage this ongoing open trade exposure, attempting to “reel it back in” through trailing stops and or contract sizes adjustments if it gets too far out of line with what was initially expected.
When all is said and done, Hoffman estimates that they only take approximately 1 out of every 10 trades that a normal base level trend following CTA or system would. The goal of reducing this number of trades is to keep volatility to a minimum.
While Hoffman has been managing accounts since 2005, you will see that their current program goes back to only April 2007. This “new “ track record is a result of changes being made to the old program. The changes revolve primarily around the way that market correlation was measured. Around that time it became apparent to Hoffman that there are periods of “hyper-correlation” when everything seemingly becomes highly correlated for a short period of time. The idea behind the change was to reduce the potential risks created by this type of scenario.
We have often disagreed with Mr. Hoffman in the past on how he displays results, how we reported on the performance of his systems, and which portfolios our clients using his trading systems should be in. But through it all, Dean has remained a consistent and constant fixture in the systematic trading world for the past 10 years.
With little heard from other seemingly secure systematic icons like Aberration and Trend Channel recently, the fact that Hoffman is still around says something about his talents and the knowledge built into the Hoffman Asset Management program.
The thing we like best about the Hoffman program is the dynamic portfolio rotation which keeps them in just a small subset of markets, as this definitely sets them apart from other trend following managers. We also think the dynamic market rotation will result in more manageable future drawdowns than are the norm for most multi-market systematic programs.
The one thing we don’t like and disagree with Dean on is the separation of the track record into two distinct programs. We feel that the same manager has been managing mainly the same money across those two periods, and as such the track record should be one consistent set of results stretching from Nov. 2005 to present.
Neither the regulators nor Dean see it this way, and as such his new D-Doc will have the results listed as separate programs. And perhaps they are correct in doing it that way. But we do advise people to consider the full track record of the manager (from 11/05 to present), and not just the recent success. At the least, we would advise people to expect the new program to see a DD similar to the one seen in the old program in the future.
The good news is that even when the two programs are combined, it is still an impressive track record in our opinion doing something different than the usual suspects in the multi-market systematic space. And with a minimum of just $125,000 – it is an affordable program as well.
- John Cummings
IMPORTANT RISK DISCLOSURE
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The March announcement by the Federal Reserve’s FOMC indicating they were getting ready to purchase up to $300 billion of longer term treasury securities set the table for a decent rally in almost all areas of the commodity sector. The news continued to build more confidence in the equity index sector which posted another week of gains and the interest rate sector was buoyed by the thought of a strong government bid in the weeks and months to come. The news also introduced inflationary thoughts based on the sheer size of the plan - sparking rallies in most sectors that have languished on fears of reduced demand from recent worldwide economic woes. The newfound investor confidence and sentiment was evident sector wide, but the main beneficiary for the week was the energy sector which saw large price rallies across the board with the focus on stronger demand setting a strong direction. For the week Heating Oil +15.92% higher, Crude Oil futures ended +9.55%, RBOB Unleaded Gas finished +8.20% and Natural Gas rallied +7.49%.
The inflationary vibes filtered into the metals sector which, before the FOMC announcement were looking a bit tired after the safe haven buying that had been seen previously seemed to exhaust. The inflation factor and the stimulus in the U.S. and abroad that includes a hefty amount of capital for infrastructure investment kept the sellers at bay during the end of the week. For the week Copper rallied +7.90%, Palladium +5.45%, Platinum +4.87%, Silver +4.77% and Gold +2.80%.
The commodity and food arena posted rallies in most areas sparked mainly by the FOMC moves, but also on indications that supply/demand scenarios may be improving, especially with unseasonal weather occurring in many areas of the world. Some of the Grain and Oilseeds found additional support from new private forecasts of the upcoming planting intentions report that indicated the corn crop may be reduced further than earlier anticipated mainly due to the ratio between corn and soybean prices not to mention higher planting input prices for corn due to higher fertilizer costs. The Soybean rally added +8.68% followed by the Wheat +6.18% and Corn ended +2.06% higher. The soft sector also ended higher with Cocoa +8.11% leading the way followed by Coffee +5.49%, Sugar +5.12% and Cotton +2.92%. Performance in the Livestock sector was hurt by the rally in grains as Lean Hogs were -2.39% and the Live Cattle ended the week at near unchanged levels.
The currency and interest rate sectors were very volatile as news from the FOMC seemed to catch participants off guard. The proposed injection by the FED of up to $300 billion made a mess of the Dollar Index, -4.18%, as investors fled to the Continentals with the addition of more U.S. dollars into an already washed market place. The news also seemed to be designed to keep U.S. rates low for the foreseeable future sending capital to other currencies looking for better yields. For the week Swiss Franc rallied +5.02%, Euro +4.96%, British Pound +3.26% and the Japanese Yen +2.08%. The rate sector also experienced the euphoria of lower rates as the 30-year Bond futures added +2.395 and the 10-year Treasury notes ended +2.37% higher.
The Stock Indexes ended another week of positive tones as the FED action continued to aid the rebuilding of investor confidence. The market was unnerved by bond rating companies still announcing ratings cuts for some major institutions along with news of more bank takeovers by the FDIC. For the week the tech heavy NASDAQ led the rally +1.71%, followed by the Russell 2000 futures +1.48%, Mid-Cap 400 futures +1.30%, S&P 500 futures +1.26% and the Dow futures +0.50%. It should be noted this week’s gains were a bit muted as participants cautiously await the U.S. Treasury Department’s bank bailout plan expected early next week.
March continues to be a tough month for multi-market managers. Both systematic and fundamental traders have been struggling to make money during this counter-trend bear market stock index rally. The good news for any investors thinking of these programs is that it is a great time to start trading most programs. We always advise clients to start trading during drawdown rather than when managers are near equity highs and now it seems like a golden opportunity to get started in managed futures.
Managers in drawdown this month include the Attain Portfolio Advisors Strategic Diversification Program at an estimated -4.00% and the APA Modified Program at approximately -7.00%. It is also a good time to consider getting started with Robinson-Langley who is down an estimated -4.65% or Hoffman Asset Management Global Trend which is down approximately -2.51% in March. Other managers in the red include Mesirow Financial Commodities Absolute Return at -1.14% est., Dighton USA -0.63% est., DMH -0.48% est., and Clarke Global Magnum at -0.57% est.
Of course the news isn’t all bad and there are a couple managers who have been able to maneuver through the choppy market conditions and post profits this month. Leading the way is the Lone Wolf Investments Diversified program which is up approximately +4.00% this month. Lone Wolf comes from the fundamental side of the industry and has done very well trading high volatility markets like gold and US Bond futures in March. The only systematic multi-market trader in the black is Clarke Capital Global Basic which is making an estimated +0.52% this month.
Short term stock index traders have also struggled this month. Paskewitz Asset Management Contrarian 3X is holding steady for the most part at -1.54% for the month, while MSLO Asset Management is down approximately -0.24%.
As we have seen over the past 18 months, Option Trading CTAs live and die by the volatility of the market. So far this month volatility has been racing through the markets offering a challenging environment for Index Option trading managers and a welcome opportunity for Diversified Option traders. Current Index Options estimates are as follows: Ace Investment Strategists -6.68%, Cervino Diversified 1x -0.58%, Cervino Diversified 2x -1.17%, Raithel Investments +0.25%, and Zenith Index Options +0.05%. Commodity Option estimates are as follows: FCI OSS +2.06% and FCI CPP +1.70%.
FCI CPP is a new product offered by Financial Commodity Investments that is designed to trade closer to the money than their original program (Option Selling Strategy); however, it does so by hedging the initial position via a calendar spread vs. naked-only trading. For more information on the program please e-mail us at firstname.lastname@example.org.
Agriculture and Grain trading managers continue to remain relatively inactive as they await clearer signals about the current / potential direction of the markets. NDX Capital Abednego and Shadrach Programs are slightly ahead for the month (+0.26% and 0.17% respectively) while Rosetta is down approximately 2%.
Equity markets moved higher during the first half of the week and trailed off on Thursday and Friday. The two-day FOMC meeting kept things quiet on Monday and Tuesday as traders braced for the announcement on Wednesday, then sent equities and bonds sharply higher following the announcement.
Beginning with the day trading systems, Compass SP was the top performer for the week up +$2,085 on three trades for the week. AG Xtreme ES wasn’t too far behind up +$1,127.50 on two trades, both sell signals. Waugh eRL traded twice last week for a loss of -$344.42. ATB Trendy Balance v2 Dax had difficulty navigating the Dax market with six trades totaling a loss of -2,762.50 €.
Elsewhere, swing systems that bought into the rally and got out before the sell-off later in the week finished above water. Bounce eMD exited a trade from the week prior for +$1,950 to the bottom line. AG Mechwarrior ES was active with three trades for +$777.60 for the week. Finally, Strategic ES lost -$885 on two trades placed between Monday and Wednesday.
In long-term trading, the U.S. Dollar continued to fall against the major foreign currencies causing trend followers to exit their Dollar Index positions as well as their bearish positions in foreign currencies such as the Euro, Canadian Dollar and Mexican Peso.
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.